Executive Summary / Key Takeaways

• Resilient Business Model Amidst Headwinds: NewLake Capital Partners operates as a specialized, internally managed REIT providing triple-net lease real estate capital to state-licensed cannabis operators. Its disciplined underwriting, focus on limited license states, and property-level cash flow analysis have enabled a resilient portfolio, despite significant industry volatility and recent tenant-specific challenges.
• Strong Financial Health and Dividend Coverage: The company reported solid Q2 2025 revenue growth of 3.8% year-over-year to $12.9 million and a 4% increase in AFFO to $11.5 million. A conservative balance sheet, marked by a 1.6% debt-to-total-gross-assets ratio and $104.3 million in liquidity, underpins a robust 79% AFFO payout ratio, providing a substantial buffer for its attractive dividend.
• Strategic Positioning for Long-Term Growth: While near-term acquisition demand for cultivation facilities is subdued, NLCP is strategically positioned to capitalize on the cannabis industry's long-term growth drivers, including state-level legalization expansion (e.g., Texas, Kentucky, Pennsylvania) and the potential for federal rescheduling, which could unlock over $500 million in aggregate tax savings for its tenants.
• Proactive Risk Management: NLCP actively manages tenant defaults, as seen with Revolutionary Clinics and the emerging situation with AYR Wellness (AYRWF), by enforcing lease rights, utilizing security deposits, and pursuing re-tenanting. Its low leverage and ample liquidity provide flexibility to navigate these disruptions and pursue accretive opportunities, including share repurchases.
• Competitive Edge in a Niche Market: NLCP differentiates itself through deep industry expertise, strong tenant relationships, and a specialized focus that allows it to compete effectively against broader REITs and alternative financiers. The diminished competitive landscape for acquisitions further enhances its ability to deploy capital prudently.

The Cannabis Real Estate Landscape: A Specialized REIT's Approach

NewLake Capital Partners, Inc. (NLCP) stands as a distinctive, internally managed Real Estate Investment Trust, carving out a specialized niche within the burgeoning, yet complex, U.S. cannabis industry. The company's core business model revolves around providing real estate capital to state-licensed cannabis operators through long-term, single-tenant, triple-net sale-leaseback and build-to-suit transactions. This strategy positions NLCP as a critical infrastructure provider, enabling cannabis businesses to monetize their real estate assets or fund new developments, thereby freeing up capital for their core operations.

The cannabis industry operates in a unique regulatory environment, marked by a fundamental disconnect between state-level legalization and federal illegality. This dynamic creates both significant opportunities and inherent risks, including capital scarcity for operators and persistent market volatility. NLCP's strategic response has been to focus on quality properties in limited license states, where regulatory frameworks tend to support tenant profitability and long-term value creation. This disciplined underwriting approach, emphasizing property-level cash flows, forms the bedrock of its operational resilience.

NLCP's journey began on April 9, 2019, initially as GreenAcreage Real Estate Corp. The company swiftly established its REIT status by electing federal income tax purposes by December 31, 2019. Significant milestones include its 2021 Initial Public Offering, a merger that shaped its current identity, and the establishment of its 2021 Equity Incentive Plan. Expanding its financial capabilities, NLCP secured a $30 million Revolving Credit Facility in May 2022, which was subsequently upsized to $90 million in July 2022. This early focus on a robust capital structure and strategic partnerships laid the groundwork for its current portfolio.

The company's operational model is inherently designed for stability. Its triple-net leases obligate tenants for all property-related expenses, including taxes, insurance, and maintenance, minimizing NLCP's direct operational overhead. As of June 30, 2025, NLCP's portfolio comprises 34 properties across 12 states, featuring 19 dispensaries and 15 cultivation facilities. This diversification, coupled with a focus on mission-critical assets, aims to mitigate the impact of individual tenant or market fluctuations.

Financial Performance and Robust Capital Structure

NewLake Capital Partners has demonstrated solid financial performance, particularly in the context of a challenging industry. For the second quarter of 2025, total revenue increased by 3.8% year-over-year to $12.9 million. This growth was primarily driven by rental income from recent acquisitions, including an Ohio dispensary (acquired February 2025) and a Connecticut cultivation facility (acquired May 2024), as well as contributions from funded improvement allowances and annual rent escalations. Adjusted Funds From Operations (AFFO) for Q2 2025 also saw a 4% increase year-over-year, reaching $11.5 million.

The six months ended June 30, 2025, further underscore this trend, with total revenue rising 4.3% to $26.1 million. Full-year 2024 revenue grew 6% to $50.1 million, culminating in a 7.5% increase in full-year AFFO to $43.7 million, or $2.08 per share. These figures highlight NLCP's ability to generate consistent cash flow and grow earnings, even as the broader cannabis market faces headwinds.

NLCP maintains a remarkably conservative balance sheet, a critical differentiator in a high-risk sector. As of June 30, 2025, the company boasted $104.3 million in liquidity, consisting of $21.9 million in cash and cash equivalents and $82.4 million available under its $90 million Revolving Credit Facility. Its debt profile is exceptionally light, with only $7.6 million outstanding on the credit facility, translating to a mere 1.6% debt-to-total-gross-assets ratio and no debt maturities until May 2027. This low leverage provides substantial financial flexibility, allowing NLCP to weather market downturns and pursue accretive growth opportunities without undue financial strain.

The company's commitment to shareholder returns is evident in its dividend policy. The Q2 2025 cash dividend of $0.43 per share represented an AFFO payout ratio of 79%. This ratio sits comfortably below its targeted 80% to 90% range, offering a significant buffer to support continued dividend distributions even amidst portfolio disruptions. This conservative payout strategy is a testament to management's focus on long-term dividend sustainability.

Competitive Landscape and Strategic Differentiation

NewLake Capital Partners operates within a competitive landscape that includes other specialized cannabis REITs, multi-state operators (MSOs) with significant real estate holdings, traditional commercial REITs, and various alternative financing providers. Its most direct competitor, Innovative Industrial Properties (IIPR), also focuses on cannabis real estate. Compared to IIPR, NLCP's specialized focus and emphasis on tailored tenant partnerships can provide a qualitative edge in deal execution and tenant relationships. While IIPR benefits from a more established market presence, NLCP's disciplined underwriting and low leverage offer a distinct advantage in managing risk in a volatile sector.

Against MSOs like Ascend Wellness Holdings (AAWH) and Green Thumb Industries (GTBIF), which integrate real estate with their operational businesses, NLCP offers a pure-play real estate financing model. This specialization allows NLCP to achieve greater focus and efficiency in property management and lease structuring, potentially leading to lower operating costs due to its REIT structure. NLCP's role as a dedicated real estate partner enables cannabis operators to concentrate on their core business, a value proposition that differentiates it from vertically integrated competitors.

The competitive environment for new acquisitions has "greatly diminished" over the past 2-3 years, creating a more favorable landscape for NLCP to deploy capital prudently. This reduced competition, coupled with NLCP's ample liquidity, positions the company to selectively invest in high-quality assets and tenants. NLCP's competitive advantages, or moats, are rooted in its specialized focus on cannabis real estate, deep tenant relationships, and regulatory expertise. This specialization allows for enhanced pricing power through tailored leases and potentially superior margins by minimizing risks in volatile markets. By fostering long-term partnerships, NLCP achieves better capital efficiency, as stable occupancy drives consistent cash flow.

However, NLCP is not without vulnerabilities. Its primary exposure lies in the regulatory dependencies of the cannabis market and potential market concentration. Changes in federal or state regulations could impact tenant operations and, consequently, NLCP's financial performance. While the company's portfolio is diversified across 12 states and 13 tenants, a high reliance on the cannabis sector means market share could be affected if demand fluctuates significantly. NLCP mitigates these risks through its conservative financial management and proactive engagement with regulatory developments.

Industry Trends, Outlook, and Risk Management

The cannabis industry continues to evolve, presenting both opportunities and challenges for NLCP. Federal regulatory reform, particularly the potential rescheduling of cannabis from Schedule I to Schedule III, remains a pivotal catalyst. Such a reclassification is expected to eliminate IRS Section 280E, which currently burdens cannabis operators with excessively high effective tax rates. NLCP estimates this could provide its tenant base with over $500 million in aggregate tax savings, significantly strengthening their credit quality and, by extension, NLCP's lease income stability. While the DEA's rescheduling process has faced delays, management anticipates some indication of reform potential in the second half of 2025.

State-level legalization continues its march forward, albeit with mixed results. Texas recently expanded its medical cannabis program, Delaware launched adult-use sales, and Kentucky is preparing for its first medical sales later in 2025. Pennsylvania's legislators are actively debating adult-use legalization, with Governor Shapiro including it in his annual budget. Ohio's adult-use sales, while initially below expectations, are projected to ramp up significantly over time. These expansions represent long-term capital expenditure opportunities for NLCP, particularly in large, populous states like Texas, Georgia, and North Carolina.

Despite these tailwinds, the industry faces near-term headwinds, including persistent macroeconomic uncertainty, elevated interest rates (2.7% inflation as of June 2025), and capital scarcity for cannabis operators. Many operators are experiencing margin compression and debt strain, with billions in loans maturing by 2026. This "debt wall" could, paradoxically, create opportunities for NLCP. As operators approach refinancing, sale-leaseback transactions offer a means to diversify capital sources and utilize balance sheet assets more efficiently than traditional credit facilities, which often provide lower advance rates.

NLCP's portfolio has experienced specific tenant challenges, underscoring the inherent risks in the sector. AYR Wellness Inc., representing approximately 5.9% of annualized base rent across two properties, announced a restructuring in July 2025, leading to non-payment of August rent. NLCP holds 3.5 months of security deposit for each property and intends to enforce all lease rights. Similarly, Revolutionary Clinics, Inc. paid only 50% of contractual rent from June 2024 and vacated its Massachusetts facility in July 2025, leading to an estimated revenue reduction of $0.017 per share per quarter until re-leased. C3 Industries is also reevaluating its Connecticut cultivation facility build-out due to high costs, prompting NLCP to pause $11 million in unfunded improvement commitments.

Management's response to these challenges is proactive and disciplined. The conservative 79% AFFO payout ratio provides a crucial buffer against such disruptions. NLCP actively engages in re-tenanting efforts, as demonstrated by the Curaleaf (CURLF) dispensary swap in June 2025, which addressed a town's opt-out of adult-use cannabis and extended the lease term. The company's low leverage and strong liquidity are strategic assets, enabling it to navigate these issues while remaining poised for accretive investments.

Conclusion

NewLake Capital Partners presents a compelling investment thesis rooted in its specialized position within the high-growth, yet volatile, cannabis real estate market. The company's consistent financial performance, characterized by steady revenue and AFFO growth, is a direct outcome of its disciplined underwriting and triple-net lease model. A remarkably conservative balance sheet, boasting low leverage and ample liquidity, provides a robust foundation, enabling NLCP to maintain a strong dividend payout ratio and weather industry-specific and macroeconomic headwinds.

While the cannabis sector faces ongoing challenges, including regulatory delays and tenant-specific issues, NLCP's proactive risk management, strategic asset allocation, and deep industry expertise position it favorably. The long-term catalysts of federal rescheduling and expanding state-level legalization, coupled with the emerging opportunity from the industry's "debt wall," offer significant growth potential. For discerning investors seeking a high-yielding, resilient play in a unique asset class, NLCP's strategic focus and financial prudence make it a noteworthy consideration, particularly as it continues to leverage its competitive advantages to unlock value in a dynamic market.