Why investors should watch this average-crushing stock

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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 looking for consistent returns.

With its cannabis-focused real estate portfolio, NLCP offers strong dividend yields and steady rental income growth, making it an attractive choice amid market turbulence.

According to Pablo Zuanic of Zuanic & Associates, NLCP’s financial performance and dividend yield make it a potentially attractive option for investors navigating the volatile cannabis sector.

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Rental income growth and AFFO strength

NLCP’s rental income for the first half of 2024 increased 10% year over year to $12.2 million, Zuanic noted. The company’s net real estate portfolio (NREP) has increased by 2.4% since the end of 2023, bringing the total portfolio return to an annualized 12.7%.

That’s easily behind his company, Innovative Industrial Properties (IIPR), which saw a 14.6% return on its portfolio after rising 5% since the end of 2022. Despite slower growth, adjusted funds NLCP’s earnings from operations (AFFO) rose 17.% year-over-year in Q2 2024, compared to modest 1% growth for Innovative Industrial Properties, Inc. (NYSE:IIPR).

Dividend security 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 10-year US Treasury rate.

Zuanic’s projections call for 2024 AFFO of $2.10 per share, translating to a price-to-AFFO ratio of 9.4x, compared to 14.1x for IIPR, indicating potential value for NLCP investors.

Portfolio risks

Although the NLCP portfolio is fully leased, certain risks remain. Zuanic reports that Revolutionary Clinics, a tenant that accounts for 10% of NLCP’s rental income, has missed 50% of its rent payments in June and July 2024. The company is negotiating with the tenant to resolve the issue, possibly through rent deferrals or other concessions. Additionally, five operators account for 62% of NLCP’s rental income, with Curaleaf (OTC:CURLF) accounting for 22%.

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By comparison, IIPR’s top five tenants contribute 48% of rental income, highlighting potential concentration risks in both companies.

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Debt leverage among REITs

In the cannabis real estate investment trust (REIT) sector, mortgage REITs such as Chicago Atlantic ( NASDAQ:REFI ) and AFCG ( NASDAQ:AFCG ) have experienced mixed growth rates. REFI’s loan book grew 22% year-on-year in Q2 2024, while AFCG saw some notable outflows during the quarter, resulting in a smaller loan book.

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 equity, but boasts a debt service coverage ratio of 17 times, signaling a strong ability to meet its obligations.

Assessment and outlook

While NLCP is currently trading near its book value of $19.54 at $19.76 per share, IIPR is trading at 1.82 times its book value, reflecting a premium to its perceived growth potential.

Although NLCP does not have a listing on a major US exchange, Zuanic’s report suggests the company could command a premium valuation if the growth of the cannabis industry continues, especially given its solid dividend yield and strong AFFO performance.

Better returns than some REITs?

The current high interest rate environment has created an incredible opportunity for income investors to earn massive returns, but not through publicly traded REITs.

Arrived Homes, the investment platform backed by Jeff Bezos, has launched its Private Credit Fund, which provides access to a pool of short-term loans backed by residential real estate with a target net annual return of 7% to 9% paid investors monthly. It paid 8.1% in July. The best part? Unlike other private credit funds, it has a minimum investment of only $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