New Lake Capital Partners (OTC:NLCP), a real estate company focused on cannabis properties, offers an attractive investment with a 9.1% dividend yield, well above the return on 10-year government bonds.
This yield, combined with a cautious approach to debt and disciplined portfolio growth, positions NLCP as an attractive alternative to other cannabis REITs like IIPR (NYSE:IIPR) and broader industrial REITs. Trading near par value, NLCP's conservative strategy highlights its potential for stable, long-term returns, as noted by Pablo Zuanic of Zuanic & Associates.
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Attractive Valuation And Dividend Yield
One of NLCP's standout features is its 9.1% dividend yield, which is almost 500 basis points (bp) higher than 10-year Treasury bills—the benchmark for low-risk investments.
By comparison, IIPR offers a 6.7% dividend yield but trades at a 57% premium to book value, while NLCP trades at par, reflecting a more conservative approach to valuation.
Zuanic notes this discrepancy – partly due to IIPR’s NYSE listing versus NLCP’s OTC market status -suggests NLCP may be undervalued, with the potential for its valuation to increase as its market recognition grows.
The company's dividend coverage stands at 120%, demonstrating the sustainability of its payouts. NLCP's rental yield is approximately 13%, which, according to Zuanic, is notably higher than its debt cost of 5.65%, ensuring that it generates sufficient income to cover its dividends.
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Prudent Portfolio Management And Growth
NLCP operates with a low debt-to-equity ratio of less than 2%, maintaining an unleveraged balance sheet. This strategy underscores its cautious approach to capital management, particularly in an industry prone to higher volatility.
As of September 2024, NLCP's portfolio consists of 32 properties—including 17 dispensaries and 15 cultivation facilities—spread across 12 states. Zuanic noted these properties are fully rented, with an average lease term of 13.8 years, ensuring long-term income stability.
The company has demonstrated growth, with a 4% increase in its real estate book year-to-date, funded by $2.6 million in new investments in Q3 2024.
This growth rate outpaces IIPR, which reported only 2% growth over the same period.
Challenges With Tenants And Lease Amendments
Like any investment, NLCP has faced challenges with a few tenants. Revolutionary Clinics in Massachusetts and Calypso Enterprises in Pennsylvania have struggled with rent payments. The company has amended leases with these tenants and utilized escrow deposits to address rent shortfalls.
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Growth Outlook And Acquisition Strategy
As recreational cannabis markets expand in states like New York, New Jersey, Ohio, and Connecticut, NLCP is positioned for growth. Furthermore, large medical markets such as Pennsylvania and Virginia could transition to recreational sales within the next two years, creating new growth opportunities.
In 2024, NLCP made a $4 million acquisition of a cultivation facility in Connecticut (C3 Industries), with $12 million committed to building improvements. As of September 2024, the company has $21.2 million in construction-in-progress, primarily in Arizona and Connecticut, indicating continued expansion of its portfolio.
Stock Performance And Sector Comparison
Over the past 90 days, NLCP's stock has been relatively stable, down 3%, compared to the broader industrial REIT sector, which declined 13%.
NLCP trades at par, with a book value per share (BVPS) of $19.48 as of Q3 2024, well below the 57% premium at which IIPR trades. According to Zuanic, NLCP's stock is priced close to its actual value of $19.48 per share, while IIPR is trading at a much higher price above its book value.
Despite this, NLCP's superior dividend yield and low debt cost make it a potentially more attractive investment for income-focused investors.
“Five operators (four public) accounted for 65% of total rental income as of 3Q24 (Curaleaf (NASDAQ: CURLF) 23%; Cresco Labs (NASDAQ:CRLBF) 14%; Trulieve (OTC:TCNNF) 11%; Cannabist 9%; C3 8%); this compared with 68% in 3Q23. At IIPR, five operators accounted for 50% of rental income in 3Q24 (PharmaCann 17%; Ascend Wellness (CSE: AAWH) 11%; Green Thumb Industries (OTC:GTBIF) 8%; Curaleaf 7%; Trulieve 7%),” Zuanic wrote.
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