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In a volatile cannabis market driven by regulatory uncertainty and the upcoming US election, New Lake Capital Partners (OTC:NLCP) stands out as a stable option for investors seeking consistent returns.
With its cannabis-focused real estate portfolio, NLCP offers high dividend yields and stable rental income growth, making it an attractive choice in times of market turbulence.
According to Pablo Zuanic of Zuanic & Associates, NLCP’s financial performance and dividend yield make it a potentially attractive option for investors venturing into the volatile cannabis sector.
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Rental income growth and AFFO strength
NLCP’s rental income for the first half of 2024 grew 10% year-over-year, reaching $12.2 million, Zuanic noted. The company’s net real estate portfolio (NREP) grew 2.4% year-to-date, bringing its total portfolio return to an annualized 12.7%.
This is slightly lower than its peer, Innovative Industrial Properties (IIPR), which returned 14.6% on its portfolio after growing 5% year-to-date. Despite the slower growth, NLCP’s adjusted funds from operations (AFFO) rose 17% year-over-year in the second quarter of 2024, compared to a modest 1% increase for Innovative Industrial Properties, Inc. (NYSE:IIPR).
Dividend certainty and yield comparison
NLCP’s quarterly dividend of $0.43 per share yields 8.7%, significantly higher than IIPR’s 5.9% yield and 500 basis points above the US 10-year Treasury yield.
Zuanic forecasts AFFO per share for 2024 at $2.10, which equates to a price-to-AFFO ratio of 9.4x, compared to 14.1x for IIPR. This suggests potential value for NLCP investors.
Portfolio risks
While NLCP’s portfolio is fully leased, certain risks remain. Zuanic reports that Revolutionary Clinics, a tenant that accounts 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, potentially through rent deferrals or other concessions. Additionally, five operators account for 62% of NLCP’s rental income, with Curaleaf (OTC:CURLF) accounting for 22%.
By comparison, IIPR’s five largest tenants account for 48% of rental income, indicating potential concentration risks at both companies.
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Debt leverage in REITs
Within the cannabis real estate investment trust (REIT) sector, mortgage REITs like Chicago Atlantic (NASDAQ:REFI) and AFCG (NASDAQ:AFCG) have seen varying rates of growth. REFI’s loan portfolio grew 22% year-over-year in Q2 2024, while AFCG saw some notable exits during the quarter, resulting in a smaller loan portfolio.
Despite these differences, NLCP maintains a conservative debt strategy, with only $7.6 million drawn on its $90 million credit facility, representing 1.9% of equity. In contrast, IIPR has $297 million in debt, or 15% of its equity, but has a debt service coverage ratio of 17x, indicating a strong ability to meet its obligations.
Valuation and outlook
While NLCP currently trades around book value of $19.54 at $19.76 per share, IIPR trades at 1.82 times book value, representing a premium related to its expected growth potential.
While NLCP is not listed on a major U.S. exchange, Zuanic’s report suggests the company could command a higher valuation if the cannabis industry continues to grow, especially given its solid dividend yield and strong AFFO performance.
Better returns than some REITs?
Today’s high interest rates offer income-seeking investors a great opportunity to earn huge returns, but not through publicly traded REITs.
Arrived Homes, the Jeff Bezos-backed investment platform, has launched its Private Credit Fund, which offers access to a pool of short-term loans backed by residential real estate with a target annual net return of 7% to 9%, distributed monthly to investors. In July, it distributed 8.1%. The best part? Unlike other private credit funds, this one has a minimum investment of just $100.
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This article $12 Million in Rental Income: Why Investors Should Watch This Average-Crushing Stock originally appeared on Benzinga.com
