In a volatile cannabis market driven by regulatory uncertainty and the upcoming U.S. elections, New Lake Capital Partners NLCP stands out as a stable option for investors seeking consistent returns.
With its cannabis-focused real estate portfolio, NLCP offers strong dividend yields and steady rental income growth, making it an attractive choice amid market turbulence.
According to Pablo Zuanic of Zuanic & Associates, NLCP’s financial performance and dividend yield make it a potentially attractive option for investors navigating the volatile cannabis sector.
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Rental Income Growth And AFFO Strength
NLCP’s rental income for the first half of 2024 increased by 10% year-over-year, reaching $12.2 million, noted Zuanic. The company’s net real estate portfolio (NREP) grew by 2.4% since the end of 2023, bringing its total portfolio yield to an annualized 12.7%.
This is slightly behind its peer, Innovative Industrial Properties (IIPR), which posted a 14.6% yield on its portfolio after a 5% growth since year-end 2022. Despite the slower growth, NLCP’s Adjusted Funds from Operations (AFFO) rose by 17% year-over-year in Q2 2024, compared to a modest 1% increase for Innovative Industrial Properties, Inc. IIPR.
Dividend Security And Yield Comparison
NLCP’s quarterly dividend of $0.43 per share provides an 8.7% yield, significantly higher than IIPR’s 5.9% yield and 500 basis points above the U.S. 10-year Treasury rate.
Zuanic’s projections estimate an AFFO per share of $2.10 for 2024, translating to a price-to-AFFO ratio of 9.4x, compared to 14.1x for IIPR, indicating a potential value for NLCP investors.
Read Also: Delivering Returns As The Cannabis Market Tanks: What Wall St Won’t Tell You About Chicago Atlantic Real Estate’s Growth
Portfolio Risks
Although NLCP’s portfolio is fully rented, certain risks remain. Zuanic reports that Revolutionary Clinics, a tenant accounting for 10% of NLCP’s rental income, missed 50% of its June and July 2024 rent payments. The company is negotiating with the tenant to resolve the issue, possibly through rent deferrals or other concessions. Additionally, five operators account for 62% of NLCP’s rental income, with Curaleaf CURLF representing 22%.
By comparison, IIPR’s top five tenants contribute 48% of its rental revenue, highlighting potential concentration risks in both companies.
Debt Leverage Among REITS
Within the cannabis real estate investment trust (REIT) sector, mortgage REITs like Chicago Atlantic REFI and AFCG AFCG have experienced different growth rates. REFI’s loan book grew by 22% year-over-year in Q2 2024, while AFCG saw some notable exits during the quarter, resulting in a smaller loan book.
Despite these differences, NLCP maintains a conservative debt strategy, with only $7.6 million drawn from its $90 million credit facility, representing 1.9% of equity. In contrast, IIPR carries $297 million in debt, or 15% of its equity, but boasts a 17x debt service coverage ratio, signaling a strong ability to meet its obligations.
Valuation And Outlook
While NLCP currently trades near its book value of $19.54 at $19.76 per share, IIPR trades at 1.82 times its book value, reflecting a premium tied to its perceived growth potential.
Although NLCP lacks a listing on a major U.S. exchange, Zuanic’s report suggests the company could achieve a premium valuation if the cannabis industry’s growth continues, particularly given its solid dividend yield and strong AFFO performance.
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