Publisher’s Note: This video interview first appeared in our premium trading publication, Marijuana Profit Alert.

With me today is Anthony Coniglio, president and chief executive officer of NewLake Capital Partners (OTC: NLCP), a cannabis-focused real estate investment trust (REIT). NewLake owns 31 properties across 12 states, leasing to tenants with cannabis cultivation facilities and dispensaries.

Anthony, thanks for joining us today.

Thank you, John. I appreciate you having me on. I’m excited for the discussion.

Absolutely. As the beginning of a new year looms on the calendar, what do you see unfolding as the biggest trends in the cannabis industry in 2023?

You know, John, I’m actually a little bit of a contrarian with what I’ve been hearing a lot of people talk about lately.

I think 2023 is going to potentially hold some upside surprises from a margin perspective and a profit perspective for some of the operators. I actually think there will be less merger and acquisition activity than what some prognosticators are indicating for 2023.

From an M&A perspective, everybody thinks pricing is going down and people need to combine. What I worry about from that perspective is you get two underperforming companies that get together and try to make a go of it.

I think that those operators that have survived 2022 are going to be reticent about taking on a lot of risk in their portfolio, unless acquiring a distressed asset is something that is truly appealing from a strategic perspective.

You’ll see fewer deals, and you’ll see more and more of the companies really trying to drive through that profitability and free cash flow. And I think, because of some of the underinvestment in the industry in 2022, we’re going to find that there will be better profit margins than people expect.

That’s a phenomenon you see in other industries. Two weak companies think that merging will be some sort of panacea and that they’ll magically generate synergies. But often, because they’re not complementary or the merger doesn’t make strategic sense, what they get is just a weak company that’s the combination of two weak companies. Isn’t that right?

Yes, exactly. People underestimate what it really takes to make a merger successful. You don’t just put two companies together and magically it gets better.

It really is an art. My experience tells me, having done this myself and having seen it many, many times as a banker, it’s a real art to get the merger synergy out of a transaction. People underestimate how hard it is.

The marijuana industry definitely has tailwinds propelling it forward, especially in 2023. More and more states are legalizing marijuana. Obviously, the November midterm elections carried a lot of surprises.

One outcome that is directly relevant to our conversation right now is that Maryland and Missouri, two populous and influential states, legalized recreational marijuana. And when new markets are created, that means new customers, new sales, and new profits, and it lifts the share prices of cannabis companies.

But bills to lift the federal ban on marijuana in Congress remain stymied.

Do you think 2023 will finally be the year when we reach that holy grail, so to speak, when Congress finally lifts the federal ban on marijuana? Or will that hope prove illusory next year as well?

Well, we were very excited to see Maryland and Missouri approve. In fact, we have a couple of tenants in Missouri, and that’s terrific for their business and terrific for our portfolio.

But to get to the point, no. I do not see 2023 being the year. We think it’s at least three to five years out.

We had some great progress recently in approving the research bill. I think many in the Senate and also in Congress want to see the fruits of that legislation. While it’s a terrific step forward, we’re going to need to see something come out of that research work before you’ll find a lot of senators lining up to approve legalization. I think we have to let that play out.

I appreciate your realistic, cold-eyed assessment of the prospects of getting the federal ban lifted. What do you see as the major profit catalysts for marijuana equities in 2023?

A profit catalyst for the operators is that many of them will bear the fruits of their labors from 2022. More specifically, 2022 was the year that, as we all know, had tremendous difficulty for this segment.

So operators really focused on where can they eliminate expense, where can they become more efficient in their operations, and where can they drive more cash flow? How can they rationalize their businesses to focus only on those elements of the business that have some profitability, or if not cash flow, a line of sight to cash flow.

By the time we get into the second quarter of 2023, we’re going to see the fruits of those labors. The reason I stated earlier that we’re going to see so many upside surprises around positive margins and margin improvement is because they worked so hard for the past nine months to really get those costs under control and to bring out efficiencies in their processes.

Related to that, because of the federal ban, many canna-businesses are denied access to mainstream banking. Bankers are, by nature, conservative, and they’re worried about the ramifications of doing business with cannabis companies while the federal ban is still in place.

That has caused a liquidity problem for a lot of marijuana companies. It’s gotten better, but for the longest time, marijuana companies have struggled with a cash crunch.

Do you think the cash crunch will get better in 2023, or will it still be an upward climb for a lot of companies to get the liquidity they need?

The answer is, “it depends.” It depends on SAFE (the Secure and Fair Enforcement Act). If SAFE is able to get done, then I do think that will bring in some added capacity on the capital front. I don’t think it solves all problems, but I do think there’s some added capacity.

If SAFE doesn’t happen, I don’t see it improving very much at all. I just don’t see a lot of new capital coming into the sector, because the real catalyst for valuation, particularly on the equities side, for the operators, is legalization.

So if people don’t believe that will happen for at least three to five years, which is our perspective, why would they pivot away from some near-term market opportunities, away from cannabis, to deploy capital?

In fact, they’ll sit on the sideline for yet another year, wait till they get closer to the catalyst, take advantage of some of the dislocation in non-cannabis sectors of the market, and then rotate in toward the end of the year or maybe the year after.

We just talked about problematic cash flows. What are some of the other pain points that marijuana entrepreneurs are struggling with right now, and which they’ll continue to struggle with into 2023?

The biggest one is inflation on the consumer. What I’ve observed, in talking with our tenants and more broadly in the industry, is how the basket size has shrunk. The cannabis consumer has really been impacted by food and energy prices going up so rapidly.

And in that adjustment period, they really modified their behavior and cannabis consumption. Maybe they’re still consuming the same, but they’re buying less in their basket size.

WATCH THIS VIDEO: Pot Stocks Are Poised to Light Up 2023

Now, quite frankly, they’ve benefited in some of these states where we’ve seen pricing come down significantly, like in California or Massachusetts or Michigan, for that matter. We see that they’re able to buy maybe the same that they were getting before but for cheaper because the prices have come down so much.

That’s the biggest issue confronting the operators this year. Will they see inflation away from cannabis temper so that we can get the consumer to have a real steady, safe purchasing habit?

NewLake Capital Partners is a REIT, and it specializes in cannabis-related real estate. What trends do you see unfolding next year in marijuana-related real estate?

Continued demand for real estate capital. The one thing we know about the cannabis industry that is true across every single state is that it’s a capital-intensive industry. It’s capital-intensive for dispensaries. It’s capital-intensive for cultivation facilities and manufacturing facilities.

Operators want to continue to expand their business from state to state. We think there will continue to be demand for real estate capital, and we’re thrilled to be a public company and to have the capital available to invest. We’ll continue to provide capital to the industry for their real estate needs.

Anthony, that was very insightful and useful. Thanks for your time! I enjoyed it.

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John Persinos is the editorial director of Investing Daily. You can reach John at: mailbag@investingdaily.com

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