NewLake Capital Partners (OTCQX: NLCP) presents a high-risk, high-reward investment opportunity suitable for a small portion of a diversified portfolio.
Despite the inherent risks, NLCP’s high occupancy rate, solid Weighted Average Lease Term (WALT), healthy liquidity, and unique market positioning in the cannabis real estate sector offer potential for double-digit returns.
Why NLCP is Still an Attractive Investment
- Unique Property Sector with Growth Prospects
The cannabis industry in the U.S. continues to grow, driven by increasing legalization. Currently, around 90% of the U.S. population resides in medical-use cannabis markets, while 52% are in adult-use markets.
This trend suggests significant growth potential, particularly in transitioning markets from medical to adult use and expanding existing markets.
NLCP is well-positioned to benefit from these trends. The company focuses on properties leased to U.S.-licensed cannabis operators, including cultivation facilities and dispensaries.
With cannabis sales expected to grow at a compound annual growth rate (CAGR) of 10.5% from 2023 to 2027, NLCP stands to gain from the increasing demand for cannabis-related real estate.
- Strong Business Metrics and Leases
NLCP maintains a 100% occupancy rate and a WALT of 14.1 years, reflecting the high quality of its portfolio. The company’s leases are triple net, meaning tenants cover most property-related costs.
This lease structure, coupled with annual rent escalations averaging 2.6%, ensures stable and growing revenue streams.
Compared to its larger competitor, Innovative Industrial Properties (IIPR), NLCP holds its ground with a high occupancy rate and comparable WALT. While tenant concentration remains a concern, NLCP has demonstrated its ability to manage tenant issues effectively, ensuring continued operational stability.
- Financial Health
NLCP boasts a robust financial position with negligible debt. As of March 31, 2024, the company had only $4 million in debt against a $420 million real estate portfolio. It also held $107 million in liquidity, positioning it well for future investments and growth opportunities.
In 2023, NLCP reported an AFFO per share of $1.89, up 6.8% year-over-year. The company’s forward AFFO payout ratio is approximately 78.5%, supporting a healthy dividend yield of around 8.2%.
- Attractive Valuation Outlook
NLCP trades at a forward-looking P/FFO multiple of approximately 9.9x, compared to IIPR’s 13.0x. This valuation suggests potential for multiple appreciation, especially as NLCP continues to execute its growth strategy and benefit from favorable industry dynamics.
Given NLCP’s strong business metrics and growth prospects, a revaluation to a P/FFO range of 11.0-12.0x is plausible, offering an additional 10% upside from multiple appreciation alone.
Risks to be Aware of
- Regulatory Environment
The cannabis industry is highly dependent on regulatory changes. While ongoing legalization trends are positive, any adverse regulatory developments could impact NLCP’s growth prospects and financial performance.
- Tenant Concentration
NLCP’s high tenant concentration poses a risk. The largest tenant accounts for 23.4% of annual base rent (ABR), and the top four tenants contribute over 50% of ABR. Any financial difficulties faced by these tenants could significantly affect NLCP’s revenue.
- High-Interest Rate Environment
While NLCP currently has minimal debt, future growth may require additional capital. High-interest rates could increase the cost of borrowing, impacting profitability and limiting the company’s ability to finance new investments.
Conclusion
NewLake Capital Partners represents a compelling high-risk, high-reward investment opportunity in the cannabis real estate sector. The company’s strong business metrics, financial health, and growth prospects, coupled with an attractive valuation, offer potential for significant returns.
However, the inherent risks associated with the cannabis industry and high tenant concentration warrant cautious investment, making NLCP suitable for a small portion of a diversified portfolio.
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Dean is a freelance content writer who contributes to various Digital Media Companies and independent websites all over the world. He has over 20 years of financial industry experience, so it’s safe to say he’s well informed.
