NewLake Capital Partners: I'm Still Buying This Strong Growth And High-Dividend Stock

seekingalpha09-23

NewLake Capital Partners is a specialized REIT with excellent margins and a safe and very high dividend yield.The company holds second place in an industry positioned for massive growth, with incoming...

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(OTCQX:NLCP) is a young REIT yet has produced high margins, a very attractive dividend yield of 8.27%, and is positioned as one of the leaders of an accelerated growth industry. Its high dividend makes it an excellent investment to buy and hold as its business continues to grow and mature. The Cannabis Industry NewLake Capital Partners is currently the second-largest Cannabis REIT in the US. Market, after Innovative Industrial Properties, Inc. (IIPR). NLCP is a very young company, founded in 2019, which is natural as the Legal Cannabis market in the U.S. is rather recent; even though California legalized medical marijuana in 1996, the trend for the more widespread legalization of both recreational and medical marijuana started in 2016. New Lake Capital Partners: Q2 Presentation of August 8, 2024 The industry is one with high-growth potential, with estimates ranging from a 10.5% CAGR (a more conservative number and the one is used by NLCP) to 12.1% CAGR until 2030. Right now, 74% of Americans live in a state with either recreational, medicinal, or both uses of cannabis legalized.   Cannabis dispensaries have high growth in the coasts. (Pew Research Center) This shows the signs of an industry with explosive growth potential, with a deep cultural shift in the perception of cannabis by Americans. New Lake Capital Partners: Q2 Presentation of August 8, 2024 This year marked an important milestone for legal cannabis, as the DOJ made moves towards reclassifying weed as a lower-risk drug, something the industry particularly welcomed as it would also bring a lower tax bracket and easier access to financing. As in any industry, the customers and the regulations are two of the most important things to consider; in the case of cannabis, regulation is especially important, as this new industry still has harder access to traditional finance. On the customer side, things are looking bullish, with daily marijuana consumption surpassing alcohol. With this high-growth outlook for the industry as a whole, let's now take a deeper look at NLCP stock. NewLake Capital Partners, A Specialized REIT NewLake holds a comfortable second place within the Cannabis REIT business, with a presence in 12 states, including California, which surprisingly is the second-largest cannabis market after Michigan; while the latter state is not within the current portfolio for NLCP, it would be a welcome addition. Something I'm watching for as a key, albeit rough metric is the addition of more states for the NewLake Partners portfolio; as the legal market is so new, it's vital to grab as much territory as possible before other rival companies start capturing customers and digging moats around themselves. New Lake Capital Partners: Q2 Presentation of August 8, 2024 The current Tenant/Borrower compositions are well diversified, with no single tenant holding more than 25% of the portfolio. It's also nicely balanced between companies focused on the recreational vs. the medical use of cannabis.  \"It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people.\" Adam Smith, The Wealth Of Nations, Book I, Chapter I, p. 22, para. From adamsmithworks.org  Even though the venerable Scottish philosopher and economist didn't write about cannabis, I think his main points on the division of labor still hold true, and we will see a deepening of division among the medical and recreational markets as each moves into ever more specialized roles. Thus, it is key to hold a well-balanced portfolio now and continuously expand into more local markets; there is much uncertainty about how the industry will evolve. As such, I believe that only by pushing their early mover advantage as hard as they can will NLCP build up the necessary base to survive and thrive for years to come. NewLake holds 100% of its portfolio in triple net leases with 15 to 20-year terms and seems to hold strict adherence to industry standards for financial safety. New Lake Capital Partners: Q2 Presentation of August 8, 2024 NewLake Capital Partners has a pretty good long-term outlook for their leases, with less than 5% expiring in the next 10 years. New Lake Capital Partners: Q2 Presentation of August 8, 2024 In my opinion, the current portfolio for NLCP stock seems to be pretty solid, well-diversified, and with plenty of room to grow. It also has a great long-term outlook, with a low percentage of expirations expected for the short term; this adds needed stability for a specialized REIT in a new industry. NLCP Funds From Operations The FFO per share is one of the most important metrics for any REIT. NewLake was hit by the COVID pandemic, as we can see by the negative FFO per share in 2021, but a quick recovery has produced growth since then. Data by YCharts The Quarterly FFO Per Share currently sits at $0.503 with a miss of $147.00K. The FFO didn't show much growth in the last two quarters, but it is something that should be closely watched. New Lake Capital Partners: Q2 Presentation of August 8, 2024 I personally think we are still in a great situation for NLCP, but I will pay particular interest to the FFO evolution in Q3 and Q4, as FFO advance seems to have slowed in the first half of 2024. While I believe this is still on the bullish side of things, NLCP is veering closely to the cautious optimism and will need growth in Q3 and Q4 for me to maintain the current rating. NLCP Debt On the short-term front, we have a current ratio of 0.943 for NewLake Capital Partners; this means current liabilities outweigh their current assets. It's worrisome that the current ratio has been steadily going down since late 2021, and the company should try to improve the ratio to better face its short-term obligations. Data by YCharts Long-term debt seems manageable at $7.60M, while the long-term assets are $410.65M. Because REITs are companies with a particularly long-term horizon, I weigh the longer-term financial situation more heavily than the short-term, and here, NewLake is currently rather strong. Data by YCharts Of course, long-term debt has grown faster than long-term assets, so this is another thing that I will monitor very closely in the next quarters. In my opinion, the balance sheet is one of the best places to find the first warning signs of future problems and long-term debt, even though distance is one such thing to consider. Yet, I rate this as very good overall. NewLake Profitability Profitability remains a strong point for NewLake, with excellent margins such as a high Gross Profit of 98.88%, a particularly great Net Income Per Employee of 3.32M, and a Levered FCF Margin of 70.02%. Seeking Alpha Premium This makes NewLake Capital Partners Inc. a very young but high-profit business, an excellent combination for any bullish thesis. I expect margins to normalize in the coming years, as extreme situations in either direction can't last too long, so the real test here is for NLCP to make wise investments while their high margins last. In my opinion, they should be gaining more locations in more states, solidifying their customer base, and building great relationships with local governments, contractors, and other key players in the real estate world. In short, investing now into investments and good relationships with their business environment will last for years to come and help them hold on to their second place as the industry matures. This remains a cornerstone of my bullish thesis for NLCP and the basis of my bullish forecast for the stock. NLCP Stock Dividend One of the strong points for NewLake is its high dividend yield, currently at 8.27%. It also has a margin of safety, paying $1.72 per year vs. the estimated FFO per share yearly of $1.99. NewLake Capital Partners also has a strong track record of dividend increases, despite the small size of the company and its young history. New Lake Capital Partners: Q2 Presentation of August 8, 2024 This makes for a compelling case that NLCP has a commitment to shareholders. Even more, the high dividend yield adds a margin of safety to the investment; if either NLCP or the cannabis market grows slower than expected, and capital gains take years for NLCP stock, investors can still hold their stock while cashing and reinvesting a very comfortable dividend. This is actually what I intend to do unless the situation changes, as I'm a firm believer that the vast majority of dividends should be automatically reinvested in the companies that produced them, moreover, if those companies have plenty of space to grow. The Power Of Compounding should never be underestimated. (exploringfinance.github.io) I believe the power of compounding should never be understated and should be one of the key things for any investor to watch. The combined dividend safety, high yield, and continuous commitment by NLCP to raising it make me think very bullish, and I will continue reinvesting dividends into NewLake Capital Partners as a strategy for wealth creation. Competition In The Cannabis Industry IIPR remains the biggest competitor for NLCP, with a market cap of $3.82B vs the $453.50M of NewLake Capital. Innovative Industrial Properties has a pretty similar business model, also using the classic triple net lease for the cannabis business, and has a pretty similar geographical diversification, with the advantage of having a base in Michigan, which is currently the biggest cannabis market in the U.S. INNOVATIVE INDUSTRIAL PROPERTIES NYSE: IIPR INNOVATIVEINDUSTRIALPROPERTIES.COM COMPANY PRESENTATION - AUGUST 2024 I expect more competition as the market becomes more mainstream, especially with laxer regulations that will open the floodgates to institutional capital. Newcomers are a danger to any industry but are particularly dangerous for young ones; even though NLCP still holds very strong margins, competition could, and, in fact, I expect, to erode them in the coming years. So, I will keep a close eye on the industry and its evolution. Risks Any new industry is at a higher risk than older industries because many of them are still unknown. Currently, the most significant danger, in my opinion, is the possibility of regulatory backtracking, pushing the industry back into a greyer market, with an unlikely but worst-case scenario being a full-on return to the black market. NLCP, as a REIT, manages to diversify the industry's risks by having a wide variety of tenants, yet still faces the regular risks for REITs, such as being sensitive to interest rate changes or facing issues in the supply and demand of the real estate market. The other big dangers for the future of NLCP lie within the industry; with its bigger competitor, IIPR, currently holding the largest market in Michigan and planning to make inroads into other states, NLCP finds itself in a race to secure as much of the young U.S. Cannabis market as possible. These risks together paint a turning point for both NewLake and the industry; as regulatory fears subside, we will most surely move into an era of higher competition with its subsequent normalization of margins and fight for the limited real state. I remain convinced that NewLake Capital Partners will still perform exceptionally well in this new market environment. Yet, I remain cautious and will continue watching for signs of any possible deterioration of the business model. Valuation My valuation for NLCP stock shows a very favorable financial situation compared to its biggest competitors and a few other industrial REITs; even though not cannabis-focused, they still make for an interesting comparison. Google Spreadsheets, author's calculations using Seeking Alpha's Premium Data Not only does NewLake Capital Partners have a superior dividend yield, but it also stands cheaper at P/AFFO, EV/EBITDA, and P/B, showing how undervalued it is by the market, in my opinion. It also maintains its superior margins and has a very good AFFO/Total Revenue, which is expected considering how well it performed in its profitability ratios. While extremely bullish, I will still consider this valuation with a grain of salt, considering how young the market is, the limited selection of similar REITs, and the fact that the industry is not mature enough. Conclusion NLCP stock remains a great investment, with excellent margins, a very high and currently safe dividend of 8.27%, and holding second place in an industry poised for massive growth, which makes this a great opportunity. Especially as the high dividend helps add a margin of safety while the anticipated capital appreciation materializes. 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. 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