Investing in promising young companies before they get big is a dream that most investors share. But for dividend investors, small new businesses are particularly risky, as they might not have the steady cash flows required to sustain a regular payout. With real estate investment trusts (REITs), however, it's possible to have your cake and eat it too.
NewLake Capital Partners (NLCP 1.47%) is a REIT that focuses on property investments in the marijuana industry, which is itself young and rapidly growing. Since it's only recently public, it's safe to say that NewLake isn't on the radar of many investors -- and that's also exactly why it looks like a sweet deal.
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This company is off to a running start
Using sale-leaseback transactions, NewLake gobbles up cannabis cultivation real estate from marijuana businesses that are looking to raise funds by selling their property. Then, rather than looking for a fresh tenant, it simply leases out the property back to the previous owner, who continues to use the space. Its real estate portfolio includes 29 properties, 91% of which are dedicated to cannabis cultivation, with the rest being marijuana retail locations.
Since closing its initial public offering for gross proceeds of around $102 million in late August 2021, NewLake's revenue has bloomed, growing from just over $8 million to reach more than $10.1 million in Q1 of this year. In the same (short) period, its dividend grew by 175%, rising from $0.12 per share to $0.33 per share.
All of its properties are currently leased out, and its weighted average lease term is 14.3 years, which in theory means that it won't need to hunt down any replacement tenants until around the end of 2036. Presently, NewLake's roster of tenants includes industry leaders like Trulieve Cannabis and Curaleaf, which are the most likely to be good for their monthly rent. This is part of the reason why none have defaulted or deferred payment as of yet. And that's key, as the REIT requires annual rent increases to the tune of 2.6% from tenants.
Its investment strategy is to focus on states with limits on the number of licenses for cannabis facilities. The advantage of this is that its tenants, which presumably already have licenses, won't need to defend their local market share as aggressively against new entrants, as any new entrants will face the barrier of procuring one of a limited set of licenses. Therefore, the tenants may be able to achieve wider margins, making them relatively safer to rent space to.
Investors who get into the stock now are likely to get a major benefit of more dividend hikes over time, which is something that management is prioritizing. Furthermore, its forward dividend yield of 6.6% is significantly better than other leading cannabis REITs like Innovative Industrial Properties.
Getting more leverage leads to accumulating more real estate
At the moment, the company has nearly $114.8 million in cash. In terms of the returns that the company can get for its cash, its leases have a weighted average yield of 12.6%. And if it needs more money, it can borrow from a recently initiated revolving credit facility, which provisions for up to $30 million at an interest rate of 5.65% for the next three years. That's a lot of dry powder for buying more real estate in key cannabis-producing regions, like New England and California.
OTC: NLCP
Key Data Points
It's also why the company's fortunes are very likely to improve significantly over the coming years. The difference between its weighted average lease yield and its borrowing interest rate indicates that there's some headroom for debt-driven growth once the cash starts to run low. For investors, that's an additional layer of security standing between them and getting their shares diluted by a capital raise via stock issuance.
In sum, NewLake is a rising star among marijuana financing companies, and it's just getting started on its growth journey. While it faces risks stemming from the market's current dissatisfaction with cannabis stocks, it's likely to pay off for investors nonetheless -- just don't expect a company driven by the gradual trickle of rental income to outperform the market for long.
