Is Now A Good Time To Buy NewLake Capital Partners?

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When investors consider acquiring a stock, making an informed decision requires assessing numerous variables, including its fundamentals, historical performance, dividend growth and recent events.

Investors also need to determine whether the time is right to acquire a particular stock. How do analysts perceive the company’s prospects? What was the outcome of the latest quarterly earnings report? What do the technical indicators say about the risk of making a purchase now?

Take a look at one real estate investment trust (REIT) that has been performing well and stands to benefit from the federal legalization of cannabis.

NewLake Capital Partners Inc. NLCP is a New Canaan, Connecticut-based internally managed industrial REIT with 31 properties totaling 1.7 million square feet across 12 states. NewLake Capital Partners specializes in triple-net leases to cannabis companies as well as providing them with capital when necessary. Its market cap is $369.06 million. 

NewLake was founded in 2019 and had its initial public offering (IPO) in August 2021. Its tenants include the largest companies in the cannabis industry, such as Curaleaf Holdings Inc. CURLF, Cresco Labs Inc. CRLBF and Trulieve Cannabis Corp. TCNNF. As of March 2024, its properties are 100%, with an average of 14.3 years remaining on its lease terms and 2.6% annual rent escalations on 15- to 20-year leases. 

Unlike most REITs, Newlake has over $25 million in cash but only $2 million in debt. Yet, it also has an $89 million available Credit Facility if needed. 

One thing to admire about NewLake is its dividend growth record over less than three years, which it achieved because of earnings growth and low debt. In December 2023, it raised the quarterly dividend by 2.56% from $0.39 per share to $0.40 per share. It's the sixth time NewLake has raised the quarterly dividend since September 2021, when it was $0.12.

The annual $1.60 dividend now yields 8.88%, but the funds from operations (FFO) payout ratio is 86.77%, which doesn't leave a lot of room for continued dividend growth. On the other hand, its fourth-quarter FFO of $0.51 was the highest in its history and an improvement from the fourth-quarter 2022 FFO of $0.48. If the FFO continues to grow, so can the dividends.

Along with the recent dividend increase, NewLake announced an update on its share repurchase program. As of December, NewLake had acquired 908,394 shares of common stock at an average price of $13.01 per share. This was $11.8 million of the original $20 million total authorization, so there should be much more to come.

On March 11, NewLake delivered its fourth-quarter 2023 operating results. FFO of $0.51 per share beat the estimates of $0.45 per share. Revenue of $13.02 million beat the estimates of $11.41 million and its fourth-quarter 2022 revenue of $12.18 million by 6.89%.

Analysts are beginning to take notice of NewLake. On March 14, Compass Point analyst Merrill Ross upgraded NewLake from Neutral to Buy and announced an $18.25 price target.

All in all, NewLake Capital Partners looks like it will be a long-term winner. One cautionary note is that with a recent price of $18, the stock has jumped out of a four-month base and could be overbought at its present level. The stock has climbed over 49% from a low of $12.13 in early November. A decline in tenant delinquencies over the fourth quarter was one positive factor.

Another factor to keep in mind is the potential legalization of marijuana at the federal level. Presently, it's legal in some states but still illegal in others. The Drug Enforcement Administration (DEA) still classifies marijuana as a Schedule I drug with a high potential for abuse and severe psychological and/or physical dependence and no currently accepted medical use. President Joe Biden has said he disagrees with this assessment and has challenged the DEA to change its classification to a Schedule 3 substance, which means a moderate to low potential for physical and psychological dependence.

But advocates for marijuana legalization say the president hasn't done enough to legalize it on the federal level. During his 2020 campaign, Biden said that individual states should decide whether to legalize recreational use.

NewLake's facilities are in 12 states, with Pennsylvania, Florida and Illinois accounting for about  62% of its annualized base rent (ABR), but federal legalization of marijuana would likely increase that number, along with revenue and earnings. A DEA reclassification to Schedule 3 would allow cannabis companies to deduct business expenses they currently cannot because of Section 280E in the tax code and improve operator credit profiles and cash flow. Any positive financial changes for the operators are bound to be good for a cannabis landlord.

So yes, this looks like it could be a good time to start picking up shares of NewLake Capital Partners, especially on any temporary weakness.

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