NewLake Capital Stock: Undervalued Pot REIT Pays 8.5% Dividends

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Why NLCP Stock Is Compelling

The ongoing sell-off of cannabis stocks has been broad-based. Even great pot stocks have been taking a beating, which means some of them are currently trading at a serious discount. One of the most intriguing marijuana stocks these days is NewLake Capital Partners Inc (OTCMKTS:NLCP).

NewLake Capital is a real estate investment trust (REIT) focused on providing capital to state-licensed cannabis operations through sale-leaseback transactions, third-party purchases, and the funding of built-to-suit projects.

Many investors aren’t familiar with NewLake Capital because it only went public about a year ago (and the last year hasn’t been kind to stocks, especially cannabis stocks).

Despite the fact that NewLake Capital Partners Inc reports solid financial results, has the strongest pipeline in its history, and pays growing high-yield dividends, NewLake Capital stock has taken a beating. As of this writing, NLCP stock is down by:

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  • 10% over the last month
  • 21% over the last three months
  • 30% over the last six months
  • 43% year-to-date
  • 45% year-over-year

This downtrend doesn’t quite match what’s been going on at NewLake Capital Partners Inc. In fact, it shows that NewLake Capital stock is just following the same trajectory as the rest of the cannabis stock market. This too shall pass. When that will happen is anyone’s guess.

For NewLake Capital Partners Inc, it doesn’t actually matter when recreational cannabis becomes federally legal in the U.S. Cash-strapped pot companies need money now to grow their businesses.

Not every traditional bank will do business with every kind of marijuana company. And once pot becomes federally legal in the U.S., the REITs with first-mover advantages and strong relationships with big cannabis companies will do better than those that come late to the party.

I think NewLake Capital Partners Inc investors are set to be some of the biggest winners in the pot stock market. NLCP stock even has great potential in the near term. Analysts’ average 12-month price target for the stock is $29.50, which points to upside potential of around 85%.

Chart courtesy of StockCharts.com

About NewLake Capital Partners Inc

NewLake Capital provides capital to state-licensed cannabis operators through real estate sale-leaseback transactions, third-party purchases, and funding for build-to-suit projects. (Source: “Investor Presentation: September 2022,” NewLake Capital Partners Inc, last accessed September 22, 2022.)

The REIT’s real estate portfolio consists of 31 properties covering 1.7 million square feet in 12 states. The portfolio consists of 92% cultivation facilities and eight percent retail locations.

NewLake Capital Partners Inc’s properties are leased to single tenants on a long-term, triple-net basis, which means the tenants are responsible for the ongoing expenses of the properties (in addition to the rent). The leases include rent escalators of two to three percent.

The properties are currently 100% leased, and thanks to NewLake Capital Partners Inc’s astute underwriting skills, the company has collected 100% of its rent due—with no abatements or deferrals—since its founding in 2019. The weighted-average lease term is 14.5 years, with a 12% weighted-average yield.

The majority (65%) of NewLake Capital Partners Inc’s tenants are publicly traded companies. Three of the REIT’s tenants are Curaleaf Holdings Inc (CNSX: CURA, OTCMKTS:CURLF), Cresco Labs Inc (CNSX:CL, OTCMKTS:CRLBF), and Trulieve Cannabis Corp (CNSX:TRUL, OTCMKTS:TCNNF).

Q2 Revenue Up 59% Year-Over-Year; AFFO Up 78%

For the second quarter ended June 30, NewLake Capital announced that its total revenue increased by 59% year-over-year and three percent sequentially to $10.5 million. (Source: “NewLake Capital Partners Reports Second Quarter 2022 Financial Results,” NewLake Capital Partners Inc, August 10, 2022.)

The company’s second-quarter 2022 net income was $3.8 million, or $0.18 per share, up from second-quarter 2021 net income of $2.7 million, or $0.16 per share.

NewLake Capital Partners Inc’s second-quarter funds from operations (FFO) were $6.5 million, or $0.30 per share, versus $4.9 million, or $0.27 per share, in the same prior-year period. That’s a year-over-year FFO increase of 37%.

The REIT’s adjusted FFO (AFFO) in the second quarter of 2022 were $8.7 million, or $0.40 per diluted share, compared to $4.9 million, or $0.28 in the second quarter of 2021. That’s a year-over-year AFFO increase of 78%.

NewLake Capital Partners Inc ended the second quarter with $49.6 million in cash, of which $12.2 million was committed to funding tenant improvements. At that time, the company had just $3.0 million in debt.

Subsequent to the end of the second quarter, NewLake Capital announced that it had successfully increased its credit facility from $30.0 to $90.0 million. That will allow the REIT to continue investing in high-quality assets.

NewLake Capital Stock’s Dividend Increases for 5th Consecutive Quarter

NewLake Capital Partners Inc’s strong cash generation has helped it not just provide investors with high-yield dividends, but increase those dividends for five consecutive quarters.

On June 15, management declared a second-quarter dividend of $0.35 per share, for an inflation-busting yield of 8.5%. The new amount represents a six-percent increase over the $0.33 per share NewLake Capital declared in the first quarter of 2022 and a 191% increase over the $0.12 per share it paid out in the September quarter of 2021.

Analyst Take

NewLake Capital Partners Inc is an overlooked banker and landlord to the cannabis industry. NCLP stock’s price has taken a hit, but that has nothing to do with what the company has been doing.

NewLake Capital has a solid balance sheet, and the company’s scale and early-mover advantage position it for long-term success.

The REIT’s high-quality real estate portfolio provides it with above-market yields. Moreover, the company’s foothold in a high-growth industry with significant demand for capital should allow it to meaningfully grow its AFFO and dividends.