NewLake Capital Partners (OTCMKTS:NLCP) is positioning itself as a significant player in the cannabis real estate investment trust (REIT) sector, aiming to offer a compelling 13% yield to investors. CEO Anthony Coniglio shared insights in an interview with analyst Pablo Zuanic, highlighting the company’s strategic approach as the U.S. moves closer to potential cannabis reform.
In his discussion, Coniglio emphasized that NewLake serves as a yield-oriented investment opportunity, allowing stakeholders to benefit from the anticipated catalysts associated with cannabis legislation while receiving current income. The firm claims the title of the second-largest owner of cannabis real estate in the United States, with a diverse portfolio designed to capitalize on market opportunities.
Portfolio Overview and Operating Model
NewLake adopts a unique business model by acquiring cannabis properties and leasing them back to operators under long-term, net lease agreements. Coniglio reported that the firm currently holds 34 properties across 12 states, which includes approximately 15 cultivation sites and 19 dispensaries. The company boasts a remaining weighted average lease term of 12 years, positioning it favorably with a yield considered “above market” compared to traditional net lease real estate categories.
Among its tenants, Curaleaf, Cresco, and Trulieve stand out, collectively accounting for about half of the firm’s annualized base rent. Since going public in 2021, NewLake has increased its dividend by 80%, demonstrating a commitment to returning value to shareholders. Coniglio acknowledged that the company is being more selective with new deals as market sentiment has shifted and operational conditions have become more challenging.
Comparative Analysis with Other REITs
Coniglio drew comparisons between NewLake’s financial metrics and those of traditional net lease REITs, which typically see cap rates around 6% to 7% and offer mid-single-digit dividend yields. He distinguished NewLake from Innovative Industrial Properties (IIPR), noting that while IIPR has diversified its investments beyond cannabis, NewLake remains solely focused on the cannabis sector.
He outlined the different financing alternatives available in the market, contrasting Business Development Companies (BDCs) and mortgage REITs with sale-leaseback structures. According to Coniglio, sale-leaseback transactions tend to result in lower cap rates compared to mortgage REITs because the owner retains title and can address defaults without resorting to foreclosure.
Investors have expressed concerns regarding NewLake’s high dividend yield and its discount to net asset value (NAV). Coniglio reassured stakeholders that the company’s balance sheet remains robust, with just over $7 million in outstanding debt against a total balance sheet exceeding $400 million. He characterized NewLake as effectively in a net cash position, bolstered by over $20 million in cash reserves and a $90 million credit facility with ample capacity remaining.
Moreover, he noted that the company’s dividend payout ratio was 82% of Adjusted Funds From Operations (AFFO) in the third quarter, aligning with its target range of 80% to 90%. Coniglio suggested that the limited participation from institutional investors, coupled with the challenges of OTC trading, may contribute to the current valuation discrepancies.
Tenant Relations and Market Dynamics
Discussing tenant updates, Coniglio mentioned that NewLake successfully recovered two properties that were previously vacated by Ayr. The properties, located in Pennsylvania and Nevada, have been prepared for re-tenanting for cannabis use, with options to pivot to non-cannabis use if necessary. He also indicated that a REV Clinics property that returned to the company over the summer is currently being marketed.
Coniglio highlighted the importance of maintaining long-term relationships with tenants, exemplified by a collaboration with Curaleaf to relocate an Illinois dispensary through a deed-for-deed swap after local restrictions impacted the original location.
As discussions around federal cannabis rescheduling gain traction, Coniglio noted that there has been increased conversation in the market since January, although many are awaiting the final rule to be filed in the Federal Register to gauge its implications. He suggested that if cannabis is rescheduled to Schedule III, it could catalyze credit improvements, attract new investors, and facilitate state program expansions over the next few years.
While addressing tax concerns surrounding Section 280E, Coniglio stated that the issue would likely depend on forthcoming guidance from tax professionals. He anticipates that the IRS may pursue payment for any past 280E-related liabilities through negotiated plans based on cash flows.
When asked about the potential for a major exchange listing following rescheduling, Coniglio clarified that Schedule III would not alter NewLake’s position regarding federal legal compliance. A broader safe harbor, such as the SAFER Banking Act, would be necessary for the company to access U.S. capital markets.
Coniglio also provided insights on the evolving state-level dynamics in key markets such as Pennsylvania, Florida, Illinois, Missouri, and Massachusetts. He expressed optimism that Pennsylvania remains a strong medical market, while the situation in Florida is less certain but could improve if public consumption concerns are addressed. Massachusetts appears to be stabilizing with proposals to raise dispensary caps.
In conclusion, Coniglio reiterated that yield-oriented cannabis investments, such as REITs, may offer lower volatility compared to direct plant-touching operators. They provide quarterly income while investors await legislative changes and may benefit from improvements in the cost of capital as new funds enter the sector.
NewLake Capital Partners is uniquely positioned to navigate the evolving landscape of the cannabis industry, balancing current income with the potential for growth as reforms unfold.
