Investment Thesis:
NewLake Capital Partners, Inc. (OTCQX:NLCP) has shown a great capacity for creating high margins while paying a high dividend yield despite being a young company. NLCP is poised to continue growing with a high-growth market and has close access to potentially dozens of millions more customers at the current stage, with even more potential growth if legalization continues.
A Cannabis REIT
NewLake Capital Partners, INC. is part of a new breed of specialized REITs whose portfolio comprises cannabis industry tenants with clients in recreational and medical use businesses
The company uses the classic triple net leasing and is, for the most part, similar to any other REIT, even though the focus could sound exotic. A relatively young company with an IPO on August 20, 2021, and a market cap of 375.21 million, it has a mix of high growth potential and speculative components that make it an exciting stock.
A Green And Growing Market
The cannabis business is expected to grow strongly in the USA over the following years, with medical cannabis alone projected to grow at a 16% CAGR until 2034. This firmly positions NLCP as a growth company in a growing sector, compounding both upside potential and risks.
The global cannabis market is experiencing a Green Rush and is expected to surpass 58 Billion in sales this year, with several USA states having very attractive consumer bases.
Shifting demographics and evolving cultural acceptance of Cannabis will play a massive role in the coming Cannabis industry; with increased demand for Marijuana recreational and medical legalization, we could very well see Cannabis becoming legal in nearly all, if not the whole USA.
Newer companies like NLCP, whose IPO was just in 2021, have a head start against other competitors that await more uncertain and secure legislation and public opinion of Cannabis, while the risks of a 180-degree turn in legislation might still exist that would particularly hit hard these new companies, there is also the potential for them to develop moats around their business and successfully defend them once a more favorable climate ushers a massive entry of new participants.
The taxes resulting from the successful Arizona Green Rush will prove very attractive to legislators and could be one, if not the most significant, push for broader legalization.
The Portfolio
The NLCP’s portfolio is 1.6 million square feet in 12 states and has 100% leased properties. This last metric is positive but expected from a newer company with relatively few properties. The Tenant/Borrower composition has a decent amount of diversification in one half, yet 3 tenants account for 49.1% of the portfolio. Investors should keep this in mind, and the company should take steps to reduce risk.
Still, as a growth company, the simplest and best path for reducing the portfolio weight of those 3 big clients is to have more clients.
The lack of geographical diversification is hard capped by legislation.
We should expect to see expansions into new green pastures, especially in adjacent markets where NLCP already has active operations, such as New Mexico, Colorado, Oregon, and Washington in the West. Michigan, New York, Maine, and Virginia in the Midwest and Northeast regions would be welcome sites.
The company would follow logical geographical development and gain access to markets with millions more customers. The previously mentioned western states where cannabis is entirely legal and NLCP has not yet entered have a combined population of more than 20 million, with the eastern states having more than 41 million.
Massive markets close to the company’s current locations are always a good sign, and I rate this as a very positive and significant growth opportunity.
One massive positive catalyst for NLCP and the whole cannabis sector is a possible rescheduling of cannabis from Schedule I to Schedule III, moving the plant from the category of dangerous drug to the more accepted and lenient Schedule III.
Materially, this would mean a tax reduction for all cannabis-producing companies.
Earlier this year, federal scientists actually went ahead and recommended easing restrictions on cannabis. Possible good news on the horizon might keep pushing the whole cannabis sector upwards.
This would also come with easier access to banking, allowing the necessary credit lines to invest in a new and larger market, bringing cannabis into the fold of accepted consumer industries.
High Income And High Margins Business
FFO and AFFO mainly had a steady 2023 with a stronger Q4. As the company is quite new, there is not much data to analyze, yet it is very positive to see such early growth.
The FFO has been on a secular trend since the company’s IPO, as should be demanded from a growing company in a growing market.
Although the total Funds From Operations might seem low at only 39.29 million, they should be compared to the market cap of 375.21 million.
NLCP has a clear advantage over its peers in its capacity to profit from rent revenues. The AFFO / Total Revenues measures just that; at 86.03%, this company is 120.80% different from the rest of the sector. The AFFO yield is also superior to the rest, but “only” 41.57% more, with 10.76% as the AFFO Yield.
This capacity for profit-making and efficiency has become one of the more substantial bullish points for NLCP. If the company can keep its superior margins as it grows with the market, it could be poised to become a stock with very strong returns.
A relatively lower AFFO payout ratio is expected for a new and growing company that reinvests a higher percentage than older companies. Still, it is a metric to watch for in the coming years that the company should try to control.
In other areas, a little less key for REITs, the company still shows promising signs of strong profitability, particularly with solid Net Income per Employee, at an impressive 3.07 million per employee, and exceptionally high Net Income to Total Debt, surpassing debt at 1,229%.
This should not be too optimistically measured, yet they add to the thesis that NLCP currently has an excellent capacity to create profits.
Dividends
NLCP is a young company, so its history of dividends is still not much of a history.
The company has an attractive 8.69% dividend yield and an annual dividend of 1.57, which is well covered compared to the FFO per share of 1.823.
If NLCP can keep this up, it will have a well-earned place among the top REITs, with a high, well-covered dividend and a considerable potential upside.
Still, caution is necessary: NLCP is a new company in a new and still poorly studied market.
Competition Grows Like Weeds
Innovative Industrial Properties Inc. is one of the biggest competitors in this new market and probably the biggest threat to NLCP; with more significant amounts of capital invested, more square feet, and more states under its belt, this nemesis is one or two weight divisions above NLCP
Investors should ask: Will market growth leave room for two cannabis REITs?
I believe NLCP has solid capabilities for turning a profit and could potentially compete with IIPR, but it should try to close in on other markets that IIPR hasn’t entered yet.
This follows up on the previous need for NLCP to follow a logical expansion plan, which should be closely watched. NLCP could face a cornered market if its bigger rival uses its superior weight to block new markets for NLCP.
Conclusion
NLCP has massive untapped potential in both new markets that have already legalized cannabis, new markets that could legalize cannabis, and a possible rescheduling of cannabis that would allow lower tax pressure and easier access to banking. With that many catalysts on the horizon, this company could be a BUY alone on future growth. Still, it also has a high dividend yield, well-covered dividend, and high profitability.
I rate it as a STRONG BUY.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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