The Price Is Right: This Weed Real Estate Stock Proves Conservative Strategies Pay Off – Cresco Labs (OTC:CRLBF), Ascend Wellness Holdings (OTC:AAWH)

Xinhu Capital Partners NLCPis a real estate company focused on the cannabis industry that offers an attractive investment with a dividend yield of 9.1%, well above the return on a 10-year government bond.

This yield, combined with a cautious approach to debt and disciplined portfolio growth, makes NLCP an attractive alternative to other cannabis REITs, such as IIPR IIPR and industrial REITs more broadly. As NLCP notes, NLCP trades close to par value and its conservative strategy highlights its potential for stable, long-term returns Pablo Zuannik of Zaunic Architects.

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Attractive valuation and dividend yield

One of NLCP’s standout features is its 9.1% dividend yield, which is nearly 500 basis points (bp) higher than the 10-year Treasury bond, the benchmark for low-risk investments.

In comparison, IIPR has a dividend yield of 6.7% but trades at a 57% premium to book value, while NLCP trades at par, reflecting a more conservative valuation approach.

Zuanic noted that this discrepancy (due in part to IIPR’s NYSE listing versus NLCP’s over-the-counter market status) suggests that NLCP may be undervalued, with the potential for its valuation to rise as its market recognition increases.

The company’s dividend coverage ratio is 120%, showing the sustainability of its dividend. Zuanic said NLCP’s rental yield of about 13% is significantly higher than its cost of debt of 5.65%, ensuring it generates enough income to cover dividends.

Also read: Better than banks: Weed real estate investment company’s 14% yield beats traditional savings

Prudent Portfolio Management and Growth

NLCP maintains an unlevered balance sheet with a debt-to-equity ratio of less than 2%. The strategy underscores its cautious approach to capital management, especially in an industry prone to higher volatility.

As of September 2024, NLCP’s portfolio included 32 properties in 12 states, including 17 dispensaries and 15 cultivation facilities. Zuanic noted that the properties are fully leased with an average lease term of 13.8 years, ensuring long-term income stability.

The company has shown growth momentum, growing its real estate book by 4% so far this year and securing $2.6 million in new investment in the third quarter of 2024.

This growth rate exceeded IIPR, which reported only 2% growth during the same period.

Tenant challenges and lease amendments

Like any investment, NLCP faces challenges from a small number of tenants. revolutionary clinic in Massachusetts and calypso enterprise Penn State has been struggling to pay rent. The company modified its leases with these tenants and used escrow deposits to address the rental shortfall.

Also Read: Did You Miss This Nasdaq-Listed Weed Stock? Low-cost model meets European demand

Growth prospects and acquisition strategy

NLCP is poised to grow as recreational marijuana markets expand in states such as New York, New Jersey, Ohio and Connecticut. In addition, large medical markets such as Pennsylvania and Virginia may shift toward recreational sales within the next two years, creating new growth opportunities.

In 2024, NLCP acquired a Connecticut cultivation facility for $4 million (C3 Industrial), investing $12 million in building improvements. The company had $21.2 million in construction work in progress as of September 2024, primarily in Arizona and Connecticut, indicating continued expansion of its portfolio.

Stock Performance and Industry Comparisons

Shares of NLCP have been relatively stable over the past 90 days, down 3%, while the broader industrial REIT sector has lost 13%.

As of Q3 2024, NLCP was trading at par, with a book value per share (BVPS) of $19.48, well below the 57% premium that IIPR was trading at. Zuanic said NLCP shares were priced close to real value of $19.48 per share, while IIPR was trading well above its book value.

Still, NLCP’s superior dividend yield and low cost of debt make it a more attractive potential investment for income-focused investors.

“As of the third quarter of 2024, five operators (four public operators) accounted for 65% of total rental income (Curaleaf curly 23%; Cresco Labs CRLBF 14%; Truelife TCNF 11%; marijuana users 9%; C3 8%); compared to 68% in the third quarter of 2023. In IIPR, five players accounted for 50% of rental revenue in 3Q24 (PharmaCann 17%; Ascend Wellness AAWH 11%; Green Thumb Industries GTBIF 8%; Kula 7%; Trulieve 7%),” Zuanic wrote.

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