Anthony Coniglio: Capital Injections, REITs, Location Opportunities

Anthony Coniglio: Capital Injections, REITs, Location Opportunities

Anthony Coniglio: The credit quality improvement of our entire portfolio goes up overnight with the elimination of 280E. There are very few REITs out there that have a single catalyst that elevates the credit quality of the entire portfolio upon one action. Bryan Fields: What's up guys, welcome back to another episode of The Dime. I'm Bryan Fields, and with me as always is Kellan Finney. This week we've got a very special guest, President and CEO of NewLake Capital Partners, Anthony Coniglio. Anthony, thanks for taking the time — how are you doing today? Anthony Coniglio: I'm doing great, guys, thanks so much for having me. Looking forward to the conversation, looking forward to diving in. Kellan, how are you doing? Kellan Finney: I'm doing really well, excited to talk to Anthony. NewLake's always been one of my favorite funds out there, and excited to hold the West Coast down. I know there's some strong New York ties here on the pod today, so I'll hold the West Coast down — but I don't think there's any loyalty, I think the loyalty is probably on the East Coast for Anthony right now. Bryan Fields: For now, yeah for sure. I appreciate you setting that up. And Anthony, as we know, you and I are East Coast and Kellan's holding it down for the West Coast. I think for our listeners, maybe you can give a little background about how you got into the cannabis space, and then just a quick background on NewLake. Anthony Coniglio: Yes, it was back in 2018. I had recently sold a business I was running before NewLake. In 2018 I was really looking for opportunities out in the marketplace that could leverage what I had done previously in other businesses, which was identifying underserved markets that had compelling return dynamics and were going through fundamental change, where we thought we could bring some value and perspective to capitalize on those changes. I was introduced to the opportunity — NewLake was not my idea. I was introduced to it through a friend who had a REIT focused on multifamily, and he started talking about the opportunities available in this segment of the world he was looking at — the opportunity to get above-market cap rates, the opportunity to really be one of the first movers in the sector. It all sounded very compelling, and I kept saying, "that sounds interesting, what industry?" And he ultimately said, "it's the cannabis industry," and my first reaction, I'm embarrassed to say, was "what do you mean, come on now." My background was JPMorgan and PricewaterhouseCoopers, and to his credit, this friend said, "you're not keeping an open mind, go do the work." And I did, and I was embarrassed by what I learned — I had let the narrative that was broadly out there cloud my view of it. After I became educated, I really started focusing on this business environment and opportunity, and it was just tremendously compelling. So in late '18 we pulled together a small group of people, all shook hands, said we're going to go do this, and in early 2019 we organized the company. We went out and raised our first round of capital — by summer of 2019, $85-86 million of capital. We used that to start acquiring properties, raised more capital, acquired more properties. In early '21 we combined with a like-sized REIT called Green Acreage — we now had over $300 million of combined assets — and we used that as a springboard to the public markets in the summer of 2021, where we raised about $100 million in our IPO. We're currently traded on the OTC under NLCP, our ticker. Today we own 31 properties across 12 states with 12 separate tenants; we have about 1.7 million square feet of rentable space across cultivation and dispensary properties. That's the quick story on NewLake. Bryan Fields: I appreciate that, and I think one of the important parts to highlight is that with challenges like the cannabis industry comes opportunities for businesses to fit those needs. One of the words thrown around consistently that I'm not so familiar with, but I'd like you to elaborate on, is triple net lease. What does that mean, and in layman's terms, how does that work? Anthony Coniglio: It's a great question, because especially around real estate you could hear single net, double net, triple net. The essence of triple net is that all of the property's expenses are borne by the tenant. So say you're renting an apartment — you have to pay your own utilities, that would be a similar kind of thing, but you wouldn't have to pay if the window broke or something happened with the roof. Here, with triple net, all of the property expenses are borne by the tenant themselves. So for us it really looks more like a financing transaction — we're providing the capital for the real estate, and they provide the ongoing maintenance. Bryan Fields: Got it. So for example, a company like Curaleaf would be the one that owned the property and then sends it back — how does that back-and-forth work, from an origin standpoint and then to where it goes? Anthony Coniglio: Let me take a step back. We are a real estate investment trust, which is a classification of a real estate fund that allows us to avoid double taxation as long as we meet certain rules that Congress has put in place — primarily around distributing our earnings. So as long as we distribute our taxable income, there is no taxation at the corporate level. It's a very efficient way to gather assets for real estate and invest those assets on behalf of our shareholders. With respect to the triple net, using Curaleaf in your example: they could have a property they own and are currently operating, and they could turn around and sell it to us, and then we release it back to them immediately — no interruption to operations. They stay in possession of the building, we transfer paper, we transfer ownership. Another way we come across our properties is we can purchase properties for our tenants. As an example, we have a transaction going right now in Missouri with C3 Industries, where we actually acquired the property on their behalf, entered into a lease immediately with them, and are providing capital for the construction of the building. We could do that for an existing building, where maybe we're buying a building and then providing capital for the refurbishment and build-out, or we could do a ground-up construction. But at the end of the day, each one of these transactions leaves us with a stream of cash flows, or rental payments, that are 15 to 20 years in duration. Bryan Fields: That's awesome, and I've heard this referred to as a "sale-leaseback" — I heard the triple net proper terminology to describe it. For our listeners, could you explain why this is even necessary in the industry? Why, if I was an operator, wouldn't I just go get a loan from a bank? What is it about this that makes it such a popular way to obtain capital for these larger companies? Anthony Coniglio: Thank you for asking that, because it's critical to talk about — many people think sale-leaseback is a cannabis-oriented strategy. In fact, sale-leaseback transactions are a very regular approach for companies to fund their real estate capital needs. If you look at a Home Depot, a Lowe's, a Walgreens, Starbucks, or even a FedEx — these companies all utilize sale-leaseback transactions to fund their real estate capital needs. Why do they do that? It's inefficient for an organization to raise equity capital and use that capital to invest in a hard asset like real estate. Typically when you're raising capital, those investors want you to use it to grow earnings and grow EBITDA, and so by and large companies like to utilize sale-leasebacks or leasing in general as an efficient way to look at their capital structure. Now why has it been more prevalent in the cannabis sector? Because early on, when cannabis companies were looking to secure locations, they weren't able to lease real estate for one reason or another, so they had to raise excess capital to acquire the properties themselves. They ended up with large quantities of real estate on their balance sheets, and over time, as organizations like ours came into play, companies saw the opportunity to unburden their balance sheet and enter into a sale-leaseback. Let me make one more comment about mortgages — mortgages are another tool companies could utilize to finance their real estate capital needs, and we don't think any one company should look at any one category exclusively. We think there's a place for short-term debt, a place for mortgage debt, and a place for sale-leaseback, in coming up with a holistic strategy for capital efficiency relative to real estate. Bryan Fields: That dive is so interesting, especially the way you explained it — once these companies have to purchase property in certain states, then invest capital to get it up and running, then produce the product, then sell the product before they can start making money. Without that, they'd have to raise a ton of cash to afford the business, and this isn't the only state they're operating in. Given all these complexities, this obviously makes a big benefit to the market, allowing these operators to go forward. So are there certain states you focus on? Do all states act the same? How does that work? Anthony Coniglio: All states definitely don't act the same, and we do have a particular focus in our investment strategy. We look at three primary components: one is the operator, the management team, and the company's financials; two is the real estate — we're looking at the alternative use for the real estate and its life cycle, both within cannabis and outside of it; and third, the jurisdiction the property is in. Cannabis markets are not all made equal, as we all know. We like to look at limited-license markets — states like Illinois, Pennsylvania, or Ohio — because we think a limited-license market provides a better operating environment for the tenant, meaning typically better margins and better property-level cash flows, which are critically important for us to get paid rent, remembering these are 15-to-20-year contracts. By focusing on these limited-license states, we think our portfolio was really able to weather the difficulties in 2023 across the industry, because these businesses had a little less competition, a little more margin, a little more EBITDA cushion. Most of the issues in the industry were in states like California, Colorado, or Michigan — the more unlimited-license states. Bryan Fields: So as the landlord, what kind of compliance do you guys have to meet? Because essentially you're not a plant-touching business, but you own the land that has a plant-touching business on it — how does that affect your compliance and regulatory aspects, and are there certain states where, based on how the state laws are drafted, you just don't want to play? Anthony Coniglio: We operate in direct contention of the CSA — Section 856 says you cannot knowingly rent or lease a property to someone in violation of the Controlled Substances Act, and we're actively doing that. It's one of the key issues preventing us from getting onto a major exchange like the NYSE or NASDAQ. We operate our business to qualify in all other respects for a listing on the NYSE or NASDAQ, but for this Section 856 issue — that's why we're sitting on the OTC. That's a critical point for us. In terms of operating state to state, there's nothing specific in the state statutes we've come across at this point that would prevent us from going into a state. Bryan Fields: Thank you for clarifying — the joys of cannabis. So when you're looking at states like Missouri, is it location, location, location, or is it more like value opportunity, or strategic positioning around going first? How do you balance those three? Anthony Coniglio: Quite frankly, it's a balance of all of that. Let me give a couple of examples. We currently own two cultivation facilities for two companies in Missouri. If we were looking at dispensaries, understanding the license structure and the geography of the regions is important. In St. Louis, on the western side of the state, the way the state divided up the districts, you'd end up with roughly 60 licenses around St. Louis. If you go to the other side of the state, Kansas City, given how the counties are laid out and the resulting number of licenses, you have roughly 30 licenses — but half of Kansas City is in the state of Kansas, so you could get people crossing the border. Your addressable market in Kansas City ends up being bigger than in St. Louis, with roughly half the competition. Those are the dynamics you want to focus on. Another example is border stores — some have done very well, but as new states come online next to that border, you'll likely see a decrease in sales. We've seen that time and again, when an adjacent state opens up for medical, or in particular adult use, you'll see a significant decrease in sales. So you need to underwrite that evolution. Bryan Fields: How does the balance work with the partners, the MSOs? I'd assume they lean on you as a scout for understanding locations, because if you're partnered together in one state, they likely want continuity going forward since you've already done the diligence. So is it a matter of, "we've got exposure to three Curaleafs, we want one," or is it more, "we prefer to work with this person," and you let the market dictate? Anthony Coniglio: Another very good question. We're definitely focused on diversification, but we're also focused on concentration — we want to make sure that to the extent we're concentrated in a name, it's a name we have extreme confidence in. If you look at our top three tenants today, it would be names like Curaleaf, Cresco, and Trulieve, and we get very comfortable with those larger names, particularly in the states where we have properties with them. It's important for us to make sure we're doing business with good companies, but it isn't always that the best companies are public. We have some private company tenants that would give some of the public companies a run for their ability to generate profit and free cash flow after taxes — there are some real quality private companies out there. Just because somebody's public doesn't mean you automatically get a pass; you have to do your diligence, understand the balance sheet, the P&L, the cash flow statement, as well as the individual facilities and their long-term strategy. Bryan Fields: Does it allow you, though, if you have a really pristine property you know is a golden one, to have a bidding war against operators — say, "hey, we've got this awesome property, Cresco's interested, do you want to match, do you want to race" — is that possible, or is that not the type of business you think it works for? Anthony Coniglio: One could do that; that is not our business, we don't do development in that way. There are a couple of smaller folks out there who will buy a site, secure it, get it entitled to allow for cannabis, and then market it to various operators — we see this a lot in Florida around dispensaries. What we've found is you need a meaningful amount of local knowledge, whether it's ordinances or boards, to get approval, and it's just not in our wheelhouse. We also find that operators have a keen sense of where they want to be located, where they want to site their cultivation facility or dispensary, and they'll come to us with the property in mind. Bryan Fields: Do you guys have a minimum market size, or market cap, that companies you partner with need to have in terms of revenue they generate? Anthony Coniglio: No, it de facto becomes somewhat of a minimum. We won't do a startup — the only time we might consider one is an organization we've had a relationship with for a number of years, or maybe they're on their second or third iteration of being in a cannabis business — but we typically won't do a startup that's trying to raise capital. We like to know businesses are operating, generating cash flow, and have been successful in the markets they're in. And also audited financials — it's interesting, when we first started I thought it was just a given you'd get audited financials, but there are many companies in this industry that don't have that, some of which don't even really understand what it means to have audited financials. When you require audited financials and those other attributes, you tend to end up with companies that have some substance around the balance sheet — a larger balance sheet size or P&L size. Bryan Fields: That makes sense — before I got into cannabis I was unaware that accounting could be creative. I didn't realize that, but in cannabis there is creative accounting. Kellan Finney: So how does that work with C3 and Ron? We talked about Missouri, we talked about Pennsylvania and Florida — those are medical markets about to convert. Does that influence the positioning at all? Take us through that thought process. Anthony Coniglio: It 100% has an impact. You could look at Virginia right now — the bill, as we're recording this, is sitting on Governor Youngkin's desk, and if that bill passes, it'll be a significant boost to the Virginia market, and there are only a few players focused on that market. Again, coming back to dispensary location — if you think about Virginia's southern border, you could get sales from North Carolina if you're well situated across that border. So a transaction along the southern border with North Carolina could be very attractive if the state flips to adult use. Or a cultivation facility in Florida, or retail cultivation in Ohio — we're really trying to understand what the unlock is for the industry. Look back at what we did with our friends at C3 Industries in Missouri — we provided them capital to build out during the medical market, and had everything in place to provide capital for expansion upon approval of rec. So when that ballot initiative passed in November of '22, we were very quickly on the phone with C3, working with them on the expansion, which we've been funding for over the last year, and it's just about to be complete. That's my point about understanding the market dynamics and partnering with tenants to help them take advantage of the market opportunity. Bryan Fields: Is it something your team is reactive to — meaning once the bill gets signed you put pieces in play to acquire properties — or is it, "we know it's medical now, eventually it'll be rec, let's get this property now so when it flips we have it"? How does that decision-making process work? Anthony Coniglio: That's absolutely part of it. We'll look at states — take Pennsylvania, one of the largest concentrations in our portfolio — we believe that state will ultimately convert to an adult-use market. We don't know when — this year, next year, I don't know — but I believe firmly it will convert. So we were very comfortable making that one of our largest concentration states. Now if you look at a state with a small medical market, take Georgia — a very tiny, nascent medical market, and Georgia's a fairly popular state — I wouldn't take the same position there, because it's harder for me to envision Georgia converting to an adult-use state anytime soon. Same could be said for Texas, where there were three operators and some deals done a couple years ago — we stayed away because our view was this is a really small medical market, we haven't even seen the legislature show interest in expanding the medical market, let alone positioning capital there for a conversion to adult use. Bryan Fields: Are there any markets we're not thinking about that your team is saying, "hey, if things change here, this could be an opportunity to put some exposure"? Anthony Coniglio: I think we've hit on a couple. The obvious ones are Ohio and Florida — Florida, even without adult use, is a terrific market, large and growing, and when it does get adult use, and we believe it will, it's going to be a phenomenal market, one of the largest in the world. We touched on Virginia. Also, some of the best properties we see across the industry tend to be in more rural areas with less competition, particularly on the dispensary side, so people shouldn't ignore markets like Connecticut — a smaller market that gets less attention, but folks can be really competitive there. Not a lot's being talked about with New Jersey lately — it's a very popular state we think still has room to run in terms of growth. The interesting part for us over the last year has been watching mature states like Michigan and Massachusetts actually grow sales as pricing comes down — it makes sense, as the price point comes down and becomes more price-competitive with the illicit market, consumers switch their buying habits from the illicit market to the legal channel, and you're watching those legal sales accelerate and grow into what we thought were already saturated markets. Even a market like Illinois, which went to adult use a few years ago, we think has real growth ahead of it as more dispensaries open, leading to greater access and competition, which brings down the price point. As long as companies can manage the margin compression that comes along with that appropriately, I think it's a very healthy evolution of the marketplace. Bryan Fields: Have you guys looked at any international markets, or land in international places? Anthony Coniglio: I can't say we've evaluated specific international properties. The way we think about it, our opportunity set here in the US is so significant that we should be squarely focused here. If one of our tenants has an international property they'd like us to look at, we will evaluate it — our chairman of the board runs an international real estate business, so we have that experience within the organization. But we would probably only do that in the near term in a partnership approach, really meeting the need of an existing tenant, as opposed to going out and looking for deals in other foreign jurisdictions. Bryan Fields: One of the things that gets thrown around often is the "cannabis tax" — does your team, when negotiating for property, still face that? Anthony Coniglio: Less and less. When we first started this company back in 2018-2019, we were hearing 20-25% premiums — not actual taxes, but as you said, the "cannabis tax," the green tax — to acquire these properties. We're seeing that get less and less. I'd say it's probably 5% or less now, in that zip code. Bryan Fields: What about tenants not paying their rent — obviously a lot are rumored to not pay their taxes, and I'm curious whether, in that same breath, they decide not to pay their landlord because they have to make hard decisions and prioritize certain areas to pay first. Anthony Coniglio: This comes back to our underwriting, and one of the elements I mentioned earlier is this focus on property-level cash flows. We look at what's called EBITDAR — EBIT plus rent — trying to calculate the amount of cash flow a property could generate for the tenant. If a property can generate significant cash flow, they'll continue paying rent, because these are critical-use facilities, and without them they can't generate cash flow or profit for shareholders. It starts with underwriting the property and the property-level cash flows. But even having done that, as we experienced in 2023, there are periods where a tenant can't meet a rental payment — and that's not just for cannabis businesses, any net-lease or sale-leaseback company, when you're underwriting 15-to-20-year rent payments, you're bound to have issues within the portfolio. Out of our transactions, we've only had one property that wasn't able to pay full rent last year. We worked with the tenant, came to a settlement in early Q4, and were able to recover some of our back rent. They had liquidity issues — one of the larger wholesalers in Massachusetts — and their liquidity issues coincided with a significant, rapid drop in pricing that impacted margin. It was a real confluence of negative events. They were able to get through it, raise some incremental capital, bring in new management, and we came to an agreement in Q4. In Q4 we collected 100% of rent from all of our tenants, and we also have 100% of our properties leased right now, which we're really proud of, because all of our capital is being put to work for our investors. Bryan Fields: Is that something you guys work through in real time, or do you not find out until almost the end of Q4 that they can't write the check and you have to figure something out? Or can you feel the temperature of the water as the situation unfolds? Anthony Coniglio: We spend a lot of time following our tenants and dialoguing with them. With the regular reporting required under our lease agreements and the financials we require, you often get a sense for whether an organization is trending up or down. We're also very much in these markets, so we hear a lot about our tenants. I can't say we knew to the day there'd be an issue, but we could see there were issues, and through regular dialogue we'd learn about cultivation issues, production issues, or testing issues. I was saying this through the end of '22 into '23 on our earnings calls — it's just a matter of time until we have an issue in the portfolio, so judge us by how prepared we are and how we resolve it to get the best net present value for shareholders, as opposed to it just happening, because we always knew from inception that there would be an issue eventually. That's why we did things in our lease structures, like cross-collateralizing security deposits on multi-property transactions and cross-defaulting leases — so if somebody has a property operating well and one not operating well, they can't say "I'll pay here but not there." We have the lever to default across all of them. So we were prepared, took a collaborative approach with the tenant, they raised incremental capital with the concessions we provided, and we think we've got a credit-quality tenant that will serve our investors well going forward. Bryan Fields: I think that's really important — sometimes the winds just blow the wrong way and people get caught in a short-term situation. Is there significant modeling internally around things like wholesale price, or is it more macro-level, like here's how the industry looks in Missouri versus Maryland? Anthony Coniglio: It's extremely detailed — I'm sure our team will chuckle at that. We monitor pricing very closely, we underwrite what we think a market will do, we have our own modeling for how we think a market's pricing will evolve. We get third-party experts to provide input and we buy their data, but we come up with our own modeling based on what we know across all the markets we participate in, and even markets we don't participate in — we study them very closely. We always take haircuts off of projections because we know pricing will compress. The fact that pricing compressed across the industry last year wasn't surprising to us — it made rational sense that as competition increases, pricing decreases. It also made sense that when companies raised significant capital in 2021 to build out capacity, both manufacturing and distribution, you'd see more competition. The surprise was the severity and swiftness of the price decline. So we're always modeling in price declines, because we know that over time this industry will become commoditized, and for it to truly reach its addressable market and capacity, the price point has to come down to broaden consumer participation. Bryan Fields: That's when the scenario planning is fun but also really scary, because if it hits certain numbers, all the red lights go off. Do you factor the hemp industry and Delta-8 pricing — and now hemp-derived Delta-9 pricing — into the models as well? Anthony Coniglio: We talk about it very hard — this is a real issue for the industry, as I know you guys know, and there's really no reliable data we've come across that can truly size how these products are impacting sales on a market-by-market basis. I really hope the government closes this loophole in the Farm Bill. I think the industry is suffering, not just in sales but from a reputational perspective, looking at some of these products and how they're resulting in adverse outcomes for minors and even adults. The general public can't really discern between licensed and unlicensed product — they don't have enough information about the sector. All the bad stuff from unregulated hemp-derived products — I don't want to paint the entire industry with a bad brush, but it's pretty obvious there's negative stuff occurring, which makes more of a point for why we should have a regulated market around these products. I'm hopeful the federal government will close this loophole. To your question, we consider it, but we don't yet have reliable data to work it into our models. Bryan Fields: I'm sure that's not the only unreliable data point — the illicit market too plays into another unknown. I wonder if, if this continues, we'll lose various operators, which could send prices in various directions, kind of like what we've seen in California, where price has been up and down, then severely down. Anthony Coniglio: Yes, but what's interesting when you look at the chart for California, Colorado, or other states, you see the volatility, but it's a fascinating lesson in economics — you see the rationalization play out where pricing comes down, capacity goes down, then pricing starts to come back because supply is low and demand is still there, then people say they can make money at that price, so supply comes back in, then pricing goes down again because it's a little oversupplied. It takes a while for the market to find equilibrium, and I think we're seeing that play out in California. These aren't factors that work themselves out in weeks — it takes months and quarters. I think that supply-demand dynamic will create a more stable environment over time. Bryan Fields: Do you think eventually, without federal legalization, we'll see the price point stabilize to a similar level in every state market, or will cannabis in one state always be more expensive than in another? Anthony Coniglio: I won't say "always" — I won't speak in such absolute terms over a long time horizon. In the near term, I expect we'll maintain these state structures, and that they'll result in pricing disparities from state to state. I think you'll find clusters of states — for instance, in the Northeast, where Bryan and I are, there's such a concentration of population among states like New York, New Jersey, and Connecticut, that over time they'll have to find some equilibrium. But the difficulty is you'll need harmonization around licensing and taxation to ultimately get there. I don't see it happening across the whole country in the near or intermediate term — I think we'll have this state construct for probably the next five to eight years at least, and my crystal ball doesn't go out beyond that. Bryan Fields: Are there any facts or statistics about the cannabis industry that most people wouldn't know? Anthony Coniglio: We touched on it — this concept of markets people thought were already saturated, at "peak" cannabis volume, but as the price point comes down to the consumer, you see an extra leg of growth occur. We've observed this in Michigan and Massachusetts. People think we've hit a plateau in sales, but as price comes down, I think you get a leg up in volumes. As long as companies can manage the price compression and margin compression, and play into the volume game, there are real profit opportunities for those who can navigate those dynamics well. Bryan Fields: Do you think that's potentially related to increased consumer adoption of the plant over the course of market maturity in those states? Anthony Coniglio: A little bit of that, but I believe more of it is current purchasing activity in the illicit market moving to the newly price-competitive legal channel. I don't know that we've yet tapped into the "cannabis curious" or new cannabis entrant consumer — we're certainly getting some of that, but I don't think it's the bulk of what's driving the dynamic I described. That's another leg of growth this industry will get as we get more normalization, and ultimately legalization. I don't know about you guys, but over the last few weeks, with all the noise around cannabis in the news — whether the Vice President's roundtable at the White House or some of the noise out of Washington, D.C. — I'm hearing the dialogue more and more, not just within my circle, but overhearing it at a restaurant or walking down the street. Bryan Fields: Most people that refer to it here can smell it, and that's really their reference for how it's evolving. But I wonder, with all the catalysts on the horizon, how do those influence your business? Anthony Coniglio: We think there's a real long-term need for real estate in the cannabis industry, no matter what state you're in — demand for capital around real estate, both cultivation and retail. If you look at our portfolio, we're almost half and half in terms of the number of properties, but roughly 92% of our capital is in cultivation facilities, which makes sense because they cost more — you could have a $20-30 million cultivation facility and a $1-2 million dispensary. We think there'll continue to be demand. We believe these state constructs will continue to be prevalent for as far as our eye can see, so organizations are going to need to replicate their infrastructure, both cultivation and distribution, on a state-by-state basis, which will drive more demand for real estate capital. When we reach a world with interstate commerce, which we think is way off into the future, that's also when legalization happens, and the addressable market for this product explodes. In that world, where the industry needs to rapidly scale to meet rapid new demand, organizations will need more real estate capital to build out capacity. So we think there's a great opportunity for us to continue our focus on limited-license states with high-quality operators that have proven their ability to generate profit and cash flow. Bryan Fields: Would your team ever consider being an M&A vehicle — say, for two of "the bigs" coming together — if you have good underwriting of both assets together? Anthony Coniglio: We have a lot of M&A background — I was a banker, and some others involved in the business were too. What we've seen over the last few years is when people are talking about combining businesses, sometimes that business has owned real estate, and they'll come talk to us about executing a sale-leaseback transaction concurrent with the M&A, to create cash at closing so some of the consideration can be cash instead of just stock — it's less dilutive if they can use cash for the consideration. So in that context, yeah — would we introduce folks we know? We do that all the time. I'd say it's less and less these days because everybody tends to know each other, so there are fewer exploratory conversations. But we're not looking to be an M&A shop — we're looking to build relationships and help people succeed, because if our tenants are successful, we're going to be successful. Bryan Fields: What question do you wish more people asked you? Anthony Coniglio: Why is your stock so undervalued? I think that's been underappreciated — it's a self-serving question, but you asked it. I think until recently, people looked at NewLake and either weren't sure what we did or didn't know enough about our business to ask about the undervaluation, or where they could buy our stock. What we've done this quarter is add a page to our website listing where people can buy our stock, since it's OTC-listed and cannabis-adjacent, which makes custody difficult, as we all know. That's been helpful. We've also added information to our investor deck this quarter highlighting our valuation discount to our peers, which has been helpful in educating investors. Bryan Fields: Are you guys affected by 280E at all, indirectly? Anthony Coniglio: Yes — we're not taxed, so we're not subject to 280E directly, but we're indirectly impacted because our tenant base — we estimate they'd save over $200 million in taxes among them. That's one of the catalysts we've been highlighting in our investor deck for months: the credit quality improvement of our entire portfolio goes up overnight with the elimination of 280E. There are very few REITs out there with a single catalyst that elevates the credit quality of the entire portfolio in one action. We think we'll get two benefits: increased cash flow for our tenants, making them better credit quality, and we believe we'll see equity values go up for the sector. With that equity appreciation, we expect some operators to recapitalize their balance sheets — issue equity and pay down debt — which further improves their credit quality by reducing debt load and improving cash flow through reduced interest expense. So you get a better-capitalized, better-cash-flow tenant, and it becomes a positive feedback loop. So while Section 280E doesn't directly impact us as a tax matter, it really improves the credit quality of our tenants over time. Bryan Fields: That was really important, appreciate you sharing that. All right, Anthony, prediction time — with major potential adult-use markets on the horizon like Florida and Pennsylvania, how does NewLake plan to capitalize on the evolving market dynamics to be at the forefront of the next major wave? Anthony Coniglio: One word: relationships. What we've tried to do over the past five-plus years in this business is build relationships and a quality reputation so we can work with tenants successfully to accomplish their needs. It seems straightforward when you say "we're going to provide a sale-leaseback transaction," but most transactions have a nuance — whether it's a buildout nuance or a licensing nuance, there's always something. We like to think of ourselves as partners to these tenants, working through those issues, figuring out a way for them to be long-term successful, because our tenants' success will ultimately be our success. As we look at these states, we understand the landscape of players, and most of them know us, so we want to continue putting ourselves out there as an organization with capital to invest that can be a good long-term partner. We keep our head down, keep building relationships, do sound underwriting, and continue to pay out a quarterly dividend to our shareholders. Kellan, take a swing. Kellan Finney: I think I'm going to agree — I mean, relationships are going to be really important for NewLake moving forward. I also think patience is huge, which you guys have clearly demonstrated over the last four or five years, because there's been a lot of volatility — growth at all costs, then pulling back, capital flowing in, then no capital. Being patient and letting the storm pass, if you will, will probably put NewLake in the best place in three to five years, in my opinion. What do you think, Bryan? Bryan Fields: I think experience really matters, and exactly like Anthony was alluding to, understanding the different market dynamics and where to position their assets, but also where to move faster, will help them accelerate in the right direction — because there are certain states you really want to prioritize, like Pennsylvania, but others may change their regulatory posture in the future, which may dictate a change in strategy. Based on your team's understanding, and likely its modeling — which Kellan and I would both love to see one day, though I'm sure you can't share it — I think that will reveal opportunity points that could really be beneficial in the future. Anthony Coniglio: And if you dial back, since our IPO, what we've always talked about is not just growth, but "quality growth" — we don't want to grow just for growth's sake. While these deals are never easy, it's easier to close a transaction than it is to collect the rent for 15 to 20 years, so the hard work of collecting rent happens on the front end, doing quality underwriting. Just putting up a transaction to tell the market we had a bunch of growth, and then a year or two later we can't collect the rent, doesn't do anything for our shareholders — it just creates volatility and uncertainty. We'd rather be slow, steady, and quality. Bryan Fields: Perfect, and that 100% really stands strong, love it. So, Anthony, for our listeners who want to get in touch, want to buy NewLake stock, where can they find you? Anthony Coniglio: NewLake.com — on our investor page there's a "how to buy our stock" tab. We're listed on the OTC under the ticker symbol NLCP. Bryan Fields: Awesome, we'll put it all in the show notes. Thanks for taking the time, this was a lot of fun. Anthony Coniglio: Guys, thanks so much for having me, I really enjoyed the conversation. Bryan Fields: Likewise.