Conservative cannabis investment with dividends and downside protection Capital tied-up in real estate often prevents cannabis companies from expanding. Anthony Coniglio the President of NewLake Capital Partners (OTCQX Marketplace: NLCP) joins Dan Humiston to explain why cannabis companies are forced to purchase their real estate. He also explains how purchasing the property and then leasing it back, gives the operator cash to take advantage of cannabis related growth opportunities. Produced by PodConx MJBulls - https://podconx.com/podcasts/raising-cannabis-capital Dan Humiston - https://podconx.com/guests/dan-humiston NewLake Capital Partners - https://newlake.com/ Anthony Coniglio - https://podconx.com/guests/anthony-colignio
Conservative cannabis investment with dividends and downside protection
Capital tied-up in real estate often prevents cannabis companies from expanding. Anthony Coniglio the President of NewLake Capital Partners (OTCQX Marketplace: NLCP) joins Dan Humiston to explain why cannabis companies are forced to purchase their real estate. He also explains how purchasing the property and then leasing it back, gives the operator cash to take advantage of cannabis related growth opportunities.
MJBulls - https://podconx.com/podcasts/raising-cannabis-capital
Dan Humiston - https://podconx.com/guests/dan-humiston
NewLake Capital Partners - https://newlake.com/
Anthony Coniglio - https://podconx.com/guests/anthony-colignio
[00:00:00]
Dan Humiston: Today. At MJ bulls, we are joined by Anthony Coniglio, the president and chief investment officer at new lake capital partners.
Anthony, welcome back to this.
Anthony Coniglio: Thanks so much. Happy to be back.
Dan Humiston: A lot has happened since you were last here, including merging with green Anchorage going public. So we have a lot, we have a lot to talk about today, but before we jump in. Quickly refresh everyone's memory. New lake capital partners is the leading net lease REIT.
And that's kind of where I wanted to get started today. Anthony, can you explain why real estate is so frustrating for cannabis companies?
Anthony Coniglio: Yeah. well, it really is rooted in this disconnect between state and federal law. Under most landlord debt agreements, and quite frankly, most landlords have debt on their properties to improve returns. In most of those agreements, there is a provision that says that a landlord cannot lease to a company knowingly in [00:01:00] violation of any law.
And we all know that cannabis companies violate the controlled substances act. So that precludes a significant source of real estate capital from coming in to provide the industry with the capital they need for for real.
Dan Humiston: Yeah. So if a landlord has a lease or, or potentially C, and that leasee is engaged in some activity, even though it's legal in the state, but it's not legal federally, the landlord could lose his mortgage if you were to lease so it's not just a landlord being, I don't want to involve, they don't have any choice.
Anthony Coniglio: Right. And then some of the other traditional providers of capital for real estate just aren't there, whether they be large institutional investors or some of the public companies that look at the opportunity, they like it, but it's not sizeable enough for them to take the compliance risk and put the rest of the franchise at risk.
And so therefore we started new lake by organizing capital that was [00:02:00] dedicated to the cannabis.
Dan Humiston: Fortunately, we were in this situation because here I am I , I have a license. I can't find anybody to lease property to me. I can't get a mortgage on my own. So it really leaves me with one option and that's to purchase it outright. And that just makes it really difficult because it ties up all my cash.
So I can't do anything that I need to do. And that's kind of where you guys jump in. How do you help companies free up cash off their balance?
Anthony Coniglio: Yes. It's exactly where we come in. I do want to note that it's really no different than other industries. If you were to look at Starbucks or Walgreens or home Depot for that. All of these companies, still, at least back their properties. And why do they do it? Because they realize that the capital they raised from investors that precious capital, they raised from investors, their investors want them to make a return on that capital in the business that they are.
So, whether it be coffee or or home supply [00:03:00] or Walgreens or in this case, cannabis specifically utilizing your capital to sit on a hard asset, like real estate isn't necessarily a good use of capital. So many industries do this. Well, we do specifically in the cannabis space as we buy properties from, and for companies in the sector, we buy dispensary's.
We buy cultivation, facilities, processing facilities, and we provide non-dilutive capital for them to input or deploy into their. Then that's important because in this environment where equity valuations are down, so much companies are reticent to utilize their equity, to raise capital. So if we can provide capital for them to execute on their cap needs And their real estate platform it's, a very accretive investment for them
Dan Humiston: oh my gosh. , it's not just buying the real estate, there's a lot of cap ex that needs to be done when they buy the real estate and if you can provide them. addition to the space, you can provide them the cap X, because [00:04:00] you're now the landlord.
So it's in your best interest to do it. I imagine that's a huge benefit for
most of these companies.
Anthony Coniglio: you're, absolutely right. most of our transactions do include a significant amount of what we call tenant improvement dollars. And so we will acquire a property and we will provide. Millions of dollars for the build-out of a cultivation facility. You know, I'll give you one quick example.
We executed a transaction two years ago with a group called pure Ken, which ultimately was acquired by truly so naturally is our tenant, but we provided capital for a small footprint of the building. , they were expanding about 30,000 square feet next to it. So we purchased the building. We provided them the capital to
complete the expansion. Then we next turned and we purchased the parcel next door to them and we provided capital for an entire ground buildup. So maybe we purchased that property for half a million dollars and gave them another 15 to $20 million to actually complete that building.
Dan Humiston: I can just see where that's a huge advantage and [00:05:00] they have the confidence because they have a lease with you. So they didn't know that they're not going to, turn around and kick them out or something. So they have that advantage that they have a lease and they just pay, their monthly and , whatever is also included within the lease.
I know you work with most of the major MSOE. You mentioned one. So you must be easy to work with, but maybe you can just walk us through the process , for other companies that aren't familiar with this. If they're thinking about freeing up cash, walk us through the process.
Anthony Coniglio: Yeah. So we have a Rolodex of, well over a hundred companies. We are in dialogue with cannabis operators, whether they be retail operators, cultivators, or vertically integrated companies, whether they be single state operators, small multi-step state operators are the largest MSO in the country. And through that they are identifying where they want their expansion capital to go.
Now perhaps they want to purchase a license in a new state. They may tap into a real estate asset. They have on their balance sheet. That's fully built out in [00:06:00] order to raise that capital and use that capital elsewhere. Unlocking and raising that non-dilutive capital.
For instance, one dialogue recently, we've been speaking with the company for a couple of years and they didn't necessarily need the capital. And then one day , they turned to us and they said, we've been having this dialogue for nearly two years. Now we're ready.
We actually have the use of the capital. We'd like to go off and execute a transaction. So we understand that this is a long cycle, they call it a sales cycle and it's a long sales cycle, but for us, it's really about our relation to. We want people to know that we have specialized knowledge in the sector.
We want people to know that we are reliable counterparty. You know, There's a real issue in the cannabis sector, particularly cannabis real estate, where operators will sign up a transaction with someone, and then they don't actually have the capital to be able to close. And I could regale you for an hour with story after story.
Cannabis operator thought they were closing and getting their capital and it just didn't happen. I think over the last three years, we've really established a reputation in the [00:07:00] marketplace about doing what we say we're going to do with now being a public company, we do have robust access to capital to continue to provide the needs of that.
The industry.
Dan Humiston: It's really important. There's been a lot of shady operators and having experience within the industry and especially now that you're a public company, it gives not just your tenants, confidence, but also your investors, which is really a nice segue for us. It's a great option for the more conservative investor because they have the real estate is a backstop it's, just gives them that additional confidence.
What are some of those other real estate investment advantages?
Anthony Coniglio: let me start with our business model. Our business model is actually quite simple. We acquire these properties. We lease them back on a long-term basis, 15 to 20 years. Our leases escalate every year on average two and a half percent. So every year that rent is going up, we collect. And as a re we have to distribute 90% of our income.
And so we pay out a healthy [00:08:00] dividend to our investors. Our last dividend, we had raised from 24 cents to 31 cents. In the last quarter, if you annualize that dividend, you'll look at it. Today's stock price. We're paying a 5% yield. It's a pretty nice, healthy yield. Still with equity upside. But when you pull back the covers in terms of how we underwrite these properties, we believe that we create significant value for investors because our properties are all in limited license jurisdictions.
These are jurisdictions where the property and the license, or typically attached to each other. And so that creates meaningful value because in the limited license states like an Illinois or Massachusetts or Pennsylvania, or even a Florida or an Arizona, all locations where we have properties there is less competition, less competition means better margin, better cashflow for our tenants.
It also means that , these licenses have intrinsic value, meaning that if an operator was having difficulties. Yeah, keeping their profitability goals at one of our locations, they're unlikely to throw the keys, which happens [00:09:00] sometimes in the real estate industry. They're more likely to sell that license for five, 10, $15 million tap into the intrinsic value.
And then the buyer is approved by the state. And so the state of course has an interest in making sure it's a quality buyer. So we think for that reason that there there's a lot of durability to the cash flows that we invest. And we think once legalization happens, , the value of our real estate is going to appreciate significantly.
So we have a lot of downside protection. One last thing that investors should be aware of is when you look at real estate, one of the interesting metrics that a triple net lease rate like ours, we would disclose is you would talk about the cashflow coverage. This is how much cashflow do the properties that you own generate sufficient to pay.
Rent and a measure of the cash health of those particular properties. And typically in the read industry, they would average somewhere around three and a half times multiple. So think about EBITDA plus rent three and a half times multiple within our [00:10:00] cultivation facilities, which are industrial. And you don't normally get that type of multiple.
We have roughly six times. You didn't know, retail portfolios were over 10 times covered. And so we feel really good that the quality of our properties are going to generate that we have good quality properties that will generate cashflow to continue paying our dividend. But also there are attractive.
Should somebody else want to require the.
Dan Humiston: Wow. You said so much in there. There were so many positive things. They don't even know where to begin, but I, I think that. anybody is interested we'll have all of new lake capital partners info in the show notes, including their stock information. So if you're a company that's looking to unlock some capital or you're an investor looking at our cannabis real estate investment, just click the links in the show notes.
There's so much more that we could talk about Anthony. We never even get close to finishing, but I got to cut it off now. But thanks for being on the show. Let's do it again. It's not wait a year and a half to do the next.
Anthony Coniglio: That would be great. I always enjoy it. [00:11:00] Thank you so much for having me back. And I do look forward to the next time.