An Update On NewLake Capital Partners

Changing Sentiment, Potential Catalysts & More Dividend Hikes

Summary

• NewLake Capital Partners has had a nice run since my original post in September with shares up more than 30%.

• Management has announced two dividend hikes since then, and also did a good job with their buyback program in 2023.

• Sentiment on the sector has continued to improve, and potential regulatory changes could be a catalyst for NewLake shares.

• Shares are still cheap with a price/FFO below 10x, and the forward yield sits at 9%.

• They also have a rock solid balance sheet with plenty of liquidity for future acquisitions.

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Shares of NewLake Capital Partners have performed well since I wrote about it last fall, and shares are up more than 33% since then, closing at $18.25 yesterday (not including dividends). I’m not going to do a full recap on the company, but I wanted to discuss changing sentiment on the cannabis sector, and provide an update on the capital returns program. For the deep dive on NewLake, you can check out what I wrote in September.

NewLake Capital Partners: A Small Cap REIT With An 11.3% Dividend

Management did a nice job with the buyback program in 2023 and has announced a couple dividend raises as well. They also got occupancy on their portfolio back up to 100%, and sentiment on the sector continues to improve. We will see if catalysts for NewLake shares materialize in 2024, but I’m fine getting paid to wait for now. Despite the recent run, the valuation is still cheap with a price/FFO under 10x.

Financials & Operations Update

Since my last post, management resolved the tenant issue, so they are back to a 100% occupancy rate with their portfolio. They still sit on a balance sheet that is basically debt free and have plenty of liquidity, with $25.8M in cash and $89M available on their $90M credit facility that matures in 2027. With their balance sheet, management doesn’t have to worry about interest rates like many other REITs today. NewLake has the ability to deploy capital into new opportunities, while sentiment has changed for the better in recent months.

NewLake Capital Partners Overview

Improving Sentiment & Potential Catalysts

Sentiment has improved across the cannabis sector with the potential for a rescheduling from Schedule I to Schedule III, which would be a significant change for companies in the industry. There has also been some discussion of a change in banking regulations around the industry. To gage sentiment, we can just take a look at one of the large cannabis ETFs, the AdvisorShares Pure US Cannabis ETF MSOS 0.00%↑, which is up 43% YTD and more than 85% over the last year.

“First and foremost, we're awaiting the DEA's decision regarding the recommendation by the Health and Human Services Department to reschedule cannabis from Schedule I to Schedule III.

Such a move would eliminate the onerous Section 280E taxation and result in greater free cash flow for the industry, including our tenants. There are a few examples where REIT's entire tenant base has an opportunity to experience a meaningful improvement in credit risk profile and significant increase in cash flow overnight from a single catalyst such as this expected move to Schedule III.”

- CEO Anthony Coniglio on the recent earnings call

NewLake is still waiting for regulatory changes and permission from exchanges for a potential uplisting to the NYSE or Nasdaq. They have also begun exploring a potential listing on the TSX (Toronto Stock Exchange). If they are able to uplist, that would allow new investors to come in that are currently unable to invest in companies that trade on OTC markets. This is probably the biggest potential catalyst for an increase in the share price, but I think trying to guess the timing of regulatory changes like this is a fool’s errand in my opinion. I’ll stay patient as long as the dividends continue to flow.

“So, we continue to run the Company so that we can uplist as soon as we’re available to, but we’re also looking for alternatives and hence, the focus on TSX.”

- Anthony Coniglio, CEO

Dividend Raises & Buybacks