Investment Potential: Financial Performance, Portfolio And Growth Of Leading Public Sale-Leaseback Stock In Cannabis

Zuanic & Associates' latest report, which initiates coverage of New Lake Capital Partners NLCP with an Overweight rating explains their motivation. "As of the third quarter of 2023, its net real estate assets were valued at $375 million, a significant increase from $124 million in 2020." 

• NLCP is one of only two publicly traded sale-leaseback stocks providing capital to the cannabis sector.
• NLCP's niche positioning gains significance as the cannabis industry expands and contends with a capital supply-demand gap due to regulatory hurdles and federal illegality in the U.S., offering favorable economics for capital providers like NLCP.

Financial Performance And Growth

While NLCP has amassed $427 million in committed capital across 31 properties in 12 states, senior analyst Pablo Zuanic points out that the company has encountered challenges over the past year, resulting in stagnant adjusted funds from operations (AFFO) per share.

To navigate these challenges, NLCP has bought back over $9 million in stock, with further authorization for stock buybacks through December 2024​.

Dividends And Valuation

NLCP offers a 12% dividend yield and currently trades at a 30% discount to its net asset value (NAV). This discount is considered unwarranted, particularly when compared to its peers, such as IIPR IIPR, which trades at a 22% premium to NAV.

"It's important to note that part of this discount can be attributed to its OTC status and lower liquidity. Additionally, the stock is relatively new compared to its NYSE-listed peer, IIPR. However, we believe that the discount to non-cannabis industrial peers is significant and unjustified,” Zuanic wrote.

“Notably, IIPR is trading at a 22% premium to NAV, and the cannabis mREIT REFI is trading at par. We identify four key factors that are expected to drive above-average returns for NLCP shareholders.”

According to Zuanic, these factors include its high dividend yield, projected AFFO growth, narrowing of the discount to NAV, and a potential rally in the REIT sector in the second half of 2024 as Federal Reserve rates begin to decrease​.

Portfolio Composition

The portfolio primarily consists of well-established companies with above-average economic performance. Notably, several of these companies are publicly listed and operate across multiple states with a significant degree of vertical integration. The allocation of the portfolio is as follows:

• Curaleaf CURA: 24% of total real estate
• Cresco CRLBF: 13%
• Trulieve TCNNF and Revolutionary Clinics: 11% each
• Cannabist: 8%
• Calypso Enterprises: 7%
• Ayr Wellness AYRWF: 7%
• Acreage ACRHF: 5%
• Organic Remedies: 5%
• Bloom Medicinal: 4%
• Mint: 4%
• PharmaCann: 1%
• Greenlight: 0.5%

Capital Structure

“As of September 30, 2023, the company had utilized only $1 million from its $90 million revolving credit facility. The debt-to-EBITDA ratio stands at a mere 0.2x, and the debt-to-equity ratio is 0.25%. NLCP possesses ample capacity to leverage its balance sheet for future growth,” Zuanic noted.

He added that even if the entire credit line is used, leverage would be “reasonable” compared to the 50% average for REITs and the acceptable threshold of 100%.

However, it's noteworthy that cannabis REIT IIPR's lower 15% debt-to-equity ratio suggests a potentially riskier portfolio due to its exposure to economically challenged states.

Future Outlook And Regulatory Changes

Expected federal-level reforms in the next 6-18 months could provide tax relief and greater financial services access to cannabis companies.

Such changes are anticipated to expand NLCP's investable pool and improve the credit quality of its existing portfolio.

“Our projections anticipate an average annual increase of approximately 10% in gross real estate assets, aligning with our assumption of a 10% compound annual growth rate (CAGR) for the total US market growth through 2027,” Zuanic wrote. “Our market estimate may be conservative, not factoring in potential recreational legalization in Pennsylvania and/or Florida, and our MSO NY sales growth assumptions are also conservative.

“NLCP has the capacity and opportunity to outpace industry growth, particularly if it chooses to utilize its credit line. In the short term, a combination of 2.5% escalators and commitments of approximately $20 million should, at the very least, result in approximately 6% portfolio growth in 2024,” concluded Zuanic.

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