Executive Summary / Key Takeaways

• A Contrarian Yield in a Distressed Sector: NewLake Capital Partners offers a 13.5% dividend yield while maintaining an 82% AFFO payout ratio and a fortress balance sheet with just approximately 1.8% debt-to-assets, positioning it as a rare income play in the capital-starved cannabis real estate space.

• Proactive Risk Management Preserves Capital: Management's disciplined underwriting and hands-on approach to tenant distress—exemplified by the Revolutionary Clinics and AYR Wellness (AYRWF) situations—demonstrates that NLCP expected some failures and built sufficient cushion to protect dividend coverage while regaining control of properties for re-tenanting.

• Fortress Balance Sheet Creates Strategic Optionality: With $106 million in total liquidity, zero near-term debt maturities, and minimal leverage, NLCP has the financial firepower to capitalize on distressed acquisitions, fund build-to-suit projects, and potentially diversify beyond cannabis as management evaluates opportunities in other regulated real estate sectors.

• Tenant Concentration Is the Central Risk: The top three tenants (Curaleaf (CURLF), Cresco Labs (CRLBF), Trulieve (TCNNF)) represent 50% of annualized rental income, creating genuine concentration risk that requires monitoring, though management's property-level underwriting and limited-license state focus provide some mitigation.

• Regulatory Overhang Caps Upside but Creates Opportunity: Federal cannabis prohibition continues to weigh on tenant capital formation and operator sentiment, keeping NLCP's stock at a deep discount to book value; however, state-level expansion and potential federal rescheduling could unlock significant sale-leaseback demand from an industry holding approximately $2 billion of real estate on balance sheets.

Setting the Scene: The Cannabis Real Estate Arbitrage

NewLake Capital Partners is an internally managed real estate investment trust that has carved out a specialized niche in perhaps the most paradoxical sector in American real estate: cannabis. Founded in 2019 as GreenAcreage Real Estate Corp. and going public in 2021, NLCP provides sale-leaseback and build-to-suit financing to state-licensed cannabis operators who remain locked out of traditional banking due to federal prohibition. This disconnect—where 40+ states have legalized cannabis in some form while it remains a Schedule I drug federally—creates both the opportunity and the risk that defines NLCP's investment proposition.

The company makes money through long-term, triple-net leases that obligate tenants to cover property taxes, insurance, maintenance, and capital expenditures, delivering predictable rental income with minimal operational overhead. As of September 30, 2025, NLCP owned 34 properties across 12 states: 19 dispensaries and 15 cultivation facilities leased to 11 tenants. This portfolio generated $12.6 million in total revenue during Q3 2025, a modest 0.3% year-over-year increase that reflects both the challenging operating environment and management's deliberate decision to prioritize quality over quantity.

What makes NLCP's positioning particularly compelling is its timing. The cannabis sector is experiencing a severe capital crunch, with billions in debt maturing by 2026 and limited refinancing options. This pressure has created a buyer's market for cannabis real estate, yet NLCP has adopted a conspicuously cautious posture. As CEO Anthony Coniglio stated, "We've always said we're not going to do deals just to do deals. We only want quality growth." This discipline, while limiting near-term growth, has preserved capital and maintained dividend coverage during a period when competitors are experiencing significant distress.

Business Model & Strategic Differentiation: The Zero-Debt Moat

NLCP's core competitive advantage begins with its balance sheet. With just $7.6 million outstanding on its revolving credit facility against $432 million in gross real estate assets, the company operates with an approximately 1.8% debt-to-assets ratio that is virtually unheard of in the REIT sector. This isn't accidental—it's a strategic choice that provides three distinct advantages in the current environment.

First, zero debt eliminates interest rate risk at a time when the company's credit facility carries a variable rate of Prime plus 1% (currently 8.25%). While peers face margin compression from rising rates, NLCP's interest expense remains minimal, allowing it to maintain a 98.2% gross margin and 54.95% operating margin that are among the highest in the triple-net REIT space.

Second, the fortress balance sheet provides acquisition firepower. With $106 million in total liquidity ($23.6 million cash plus $82.4 million available credit), NLCP can act as a buyer of choice when distressed operators need to monetize real estate quickly. This dynamic is already playing out: during 2025, the company acquired three dispensaries in Ohio and committed to funding $1.08 million in improvements, all while maintaining its conservative leverage profile.

Third, the net cash position enables management to evaluate diversification beyond cannabis without jeopardizing the core dividend. Coniglio explicitly stated, "Our view is that it's our fiduciary responsibility to evaluate all avenues for creating long-term value for shareholders and that does include considering opportunities beyond cannabis." This optionality—unavailable to leveraged peers—represents a free call option on management's ability to deploy capital into other highly regulated special purpose properties.

The triple-net lease structure itself provides another layer of protection. By shifting all operational expenses to tenants, NLCP achieves capital efficiency that mortgage REITs like Chicago Atlantic (REFI) and AFC Gamma (AFCG) cannot match. When a cultivator faces margin compression from falling wholesale prices or rising input costs, NLCP's rental income remains contractually obligated—until the tenant fails. This is where management's proactive approach to tenant relationships becomes critical.

Financial Performance: Evidence of Discipline, Not Decline

NLCP's financial results tell a story of deliberate capital preservation rather than fundamental deterioration. For the nine months ended September 30, 2025, total revenue increased 2.95% year-over-year to $38.7 million, while AFFO grew 1.39% to $33.2 million. These modest gains reflect management's decision to effectively halt new acquisitions during the sector's hyper-growth phase, a strategy that Coniglio defended: "Our consistent cautious approach during the industry's hyper growth phase has positioned us well."

The Q3 2025 results reinforce this narrative. Total revenue of $12.6 million increased just 0.3% year-over-year, but this stability masks significant underlying activity. The company offset a $281,000 decline from Revolutionary Clinics vacating its Massachusetts property with contributions from two newly acquired Ohio dispensaries, $1.2 million in improvement allowances at Arizona and Connecticut facilities, and annual rent escalators of 2-3% across the portfolio. This ability to maintain revenue while transitioning problem tenants demonstrates the resilience of NLCP's diversified, multi-tenant approach.

Total AFFO increased 2.4% in Q3 to $11.0 million, with the AFFO payout ratio at 82%—comfortably within management's 80-90% target range. This metric is crucial because it shows that even after absorbing the impact of Revolutionary Clinics and AYR Wellness, the dividend remains well-covered. The general and administrative expense ratio of just 1.20% of total assets reflects the efficiency of NLCP's internal management structure, which eliminates external advisor fees that burden many REITs.

The balance sheet strength cannot be overstated. With debt representing just approximately 1.8% of gross assets and no maturities until May 2027, NLCP has eliminated refinancing risk at a time when many cannabis operators face liquidity crises. This financial architecture allows the company to function as a stabilizing force in a volatile sector while competitors with higher leverage are forced to retrench.

Tenant Issues & Risk Management: When Underwriting Meets Reality

The true test of NLCP's investment thesis lies in how management handles tenant distress, and 2025 provided multiple case studies. Revolutionary Clinics, which operated a cultivation facility in Fitchburg, Massachusetts, began paying only 50% of contractual rent in June 2024, entered receivership in December 2024, and vacated the property in July 2025. AYR Wellness, which leased properties in Pennsylvania and Nevada, ceased rent payments in August 2025 after entering a restructuring support agreement.

These failures were not surprises—they were underwritten into NLCP's risk model. As Coniglio candidly acknowledged, "We never expected to have a flawless track record, especially in such a dynamic sector." The critical question is not whether tenants fail, but how the REIT responds. NLCP's approach demonstrates sophisticated risk management that directly protects shareholder capital.

First, the company applied security deposits to cover missed rent, effectively converting credit risk into a timing issue rather than a permanent loss. Second, management immediately regained control of vacant properties for re-tenanting, avoiding the extended foreclosure processes that can plague mortgage REITs. Third, NLCP incurred just $145,000 in carrying costs for the three vacant properties in Q3 2025—a modest expense relative to the $37.5 million in annual rental income.

The C3 Industries situation further illustrates management's collaborative approach. Rather than forcing a distressed tenant into bankruptcy, NLCP amended lease agreements to pursue a sale of the Hartford, Connecticut property while reallocating rent to the Missouri facility. This solution, as Coniglio described, "manages our risk while maintaining AFFO for our investors." The amendment had a "de minimis impact on net income and AFFO," preserving dividend coverage while addressing tenant stress.

These actions matter because they validate NLCP's underwriting philosophy. The company focuses on limited-license states where barriers to entry protect incumbent operators, and it underwrites at the property level based on cash flow rather than corporate guarantees alone. When tenants fail, NLCP retains hard assets in protected markets that can be re-leased to stronger operators—a structural advantage that mortgage REITs cannot replicate.

Competitive Landscape: The Zero-Debt Advantage

NLCP operates in a niche dominated by Innovative Industrial Properties (IIPR), with mortgage REITs REFI and AFCG providing alternative capital solutions. Each competitor's struggles highlight NLCP's strategic positioning.

IIPR, the largest cannabis equity REIT with 112 properties, faces a different risk profile. While its scale provides diversification, it carries 18% debt-to-equity ratio and has experienced significant tenant restructurings, with Q3 2025 revenue declining 15% year-over-year. IIPR's larger size enables lower borrowing costs, but its leverage creates interest rate sensitivity that NLCP's zero-debt structure avoids. Moreover, IIPR's portfolio skews toward cultivation facilities, while NLCP's balanced mix of 19 dispensaries and 15 cultivation properties provides exposure to retail cash flows that tend to be more resilient during wholesale price compression.

The mortgage REITs tell a more cautionary tale. REFI, while profitable with 16.5% loan yields, faces inherent credit risk from borrower defaults and carries 33% debt-to-equity. AFCG has been devastated by loan losses, posting a GAAP net loss of $12.5 million in Q3 2025 with negative returns on assets and equity. NLCP's property ownership model provides crucial downside protection: when tenants default, the REIT retains real assets rather than impaired loan receivables.

This structural advantage becomes more valuable as the industry consolidates. With approximately $2 billion of real estate sitting on cannabis operators' balance sheets, sale-leaseback demand should accelerate as companies seek to de-lever. NLCP's ability to close transactions quickly without financing contingencies makes it a preferred partner for distressed sellers—a competitive moat that is widening as capital markets remain closed to cannabis companies.

Industry Dynamics: The Regulatory Tightrope

The cannabis industry in 2025 sits at an inflection point of simultaneous expansion and contraction. State-level legalization continues advancing—Texas expanded its medical program, Delaware launched adult-use sales, Kentucky and Minnesota prepared for market openings, and Pennsylvania's governor again included adult-use in the budget. These expansions create new addressable markets for NLCP's build-to-suit capabilities.

Yet federal prohibition persists, creating the capital formation crisis that defines NLCP's opportunity. The DEA's rescheduling process, while promised as a priority by the new administration, remains delayed. This uncertainty keeps traditional lenders on the sidelines, forcing operators to turn to sale-leaseback financing at cap rates that reflect the risk premium. NLCP's disclosed yields, as Coniglio noted, "are higher than what you would see for a typical REIT because the cannabis industry itself is more high risk and more volatile."

This dynamic creates a paradox: the same regulatory overhang that depresses NLCP's stock valuation (trading at 0.71x book value) also preserves its pricing power. If federal reform occurs, NLCP's tenants would benefit from improved access to capital and potential tax relief under rescheduling, reducing credit risk. The REIT itself could benefit from a lower cost of capital and expanded investor base. However, management wisely refuses to predicate strategy on political outcomes, maintaining that "there is no way to know when the political landscape lines up with the legislative landscape."

Outlook & Execution: Cautious Optimism with Optionality

Management's guidance reflects a nuanced view: "long-term optimistic" but "hard to not be cautious" given industry headwinds. The company expects "continued small-scale M&A, tougher financing conditions, and more industry receiverships" while maintaining that its "consistent cautious approach during the industry's hyper growth phase has positioned us well."

This caution manifests in capital deployment. NLCP completed just three dispensary acquisitions in the first nine months of 2025, a fraction of its 2021-2022 pace. The company is explicitly prioritizing dividend coverage over growth, with the AFFO payout ratio providing "some cushion to navigate the situation and continue to support our dividend distributions in the near term."

However, this restraint creates latent optionality. The $106 million liquidity reserve, combined with the ATM program's $50 million capacity, provides dry powder for opportunistic acquisitions if distressed selling accelerates. More intriguingly, management's acknowledgment that it is "evaluating all avenues for creating long-term value for shareholders" including "opportunities beyond cannabis" suggests potential diversification into other highly regulated special purpose properties where NLCP's underwriting expertise could be leveraged.

The key execution variable is re-tenanting speed. Management estimates the Revolutionary Clinics vacancy will reduce revenue by approximately $0.017 per share quarterly until re-leased, while the AYR properties could impact Q1 2026 by $0.035-$0.036 per share if they remain vacant. The company's ability to redeploy these assets in protected markets will determine whether these become temporary headwinds or permanent value impairments.

Valuation Context: Discounted for a Reason, or an Opportunity?

At $13.55 per share, NLCP trades at a significant discount to its reported book value of $19.02 per share (0.71x P/B) and generates a 13.53% dividend yield that is among the highest in the REIT sector. The valuation metrics reflect market skepticism about cannabis real estate sustainability, yet they also suggest asymmetric risk-reward for investors willing to underwrite tenant credit risk.

Cash flow multiples tell a more nuanced story. NLCP trades at 6.60x operating cash flow and 5.54x sales, both lower than IIPR's 7.80x and 5.82x respectively, despite NLCP's superior balance sheet. This discount implies the market is pricing in significant tenant defaults or regulatory impairment that has not yet materialized in NLCP's financial results. The company's 51.35% profit margin and 6.65% return on equity compare favorably to IIPR's 45.80% margin and 6.64% ROE, suggesting operational efficiency is not the issue—sector stigma is.

The dividend yield spread is particularly instructive. NLCP's 13.53% yield is only slightly below IIPR's 14.58%, yet NLCP's payout ratio of 82% provides more cushion than IIPR's 179% ratio, which indicates IIPR is paying out more than it earns. This comparison highlights NLCP's superior dividend sustainability, making the yield more than just a value trap signal.

Risks & Asymmetries: What Could Break the Thesis

Three material risks threaten NLCP's investment case, each requiring distinct monitoring frameworks.

Tenant Concentration Risk is the most immediate concern. With Curaleaf (24.4%), Cresco Labs (14.0%), and Trulieve (11.4%) representing nearly half of annualized rental income, a material deterioration at any of these major MSOs could create a dividend coverage problem that the current 82% payout ratio cannot absorb. The mitigating factor is that these are among the strongest operators in the sector, with multi-state footprints and public market access. However, as AYR Wellness demonstrated, even public MSOs can face liquidity crises that lead to rent cessation.

Regulatory Stagnation Risk remains the existential threat. If federal rescheduling or banking reform fails to materialize, the cannabis industry could face a wave of operator failures as 2026 debt maturities come due. While NLCP's low leverage provides survival capacity, a systemic industry collapse would overwhelm even the best underwriter. The countervailing force is that this same risk creates NLCP's opportunity—fewer competitors remain willing to finance cannabis real estate, allowing NLCP to be selective and command premium yields.

Interest Rate Risk is more nuanced. While NLCP has minimal debt, its tenants are highly sensitive to borrowing costs. The Prime rate at 8.25% significantly increases operator carrying costs, potentially accelerating defaults. Additionally, NLCP's own credit facility bears a floating rate, which could increase financing costs if the company needs to draw down for acquisitions. The offset is that management has structured the portfolio with annual rent escalators of 2-3%, providing organic growth that can help offset rising rates over time.

Conclusion: A Defensive Income Play With Latent Upside

NewLake Capital Partners represents a rare combination of high current income and defensive positioning in a distressed sector. The 13.5% dividend yield is not a market mispricing but a rational reflection of cannabis regulatory risk—yet it is backed by an 82% AFFO payout ratio that provides genuine cushion and a fortress balance sheet that eliminates financial leverage risk.

The investment thesis hinges on two variables: management's ability to re-tenant vacant properties in protected markets without material downtime, and the pace of federal regulatory reform that could unlock the industry's capital markets. NLCP's proactive approach to tenant issues and its track record of creative problem-solving suggest the former is achievable, while the latter remains uncertain but directionally positive.

What makes NLCP particularly compelling is the asymmetry. Downside is limited by the zero-debt balance sheet and diversified property portfolio, while upside could be substantial if rescheduling occurs or if management executes on diversification into adjacent regulated real estate sectors. The stock trades at a 29% discount to book value, offering potential capital appreciation in addition to the income stream.

For dividend-oriented investors willing to underwrite cannabis regulatory risk, NLCP provides a defensive income vehicle with management that has demonstrated discipline through the sector's boom and bust cycles. The key monitoring points remain tenant health in the top three MSOs and any signals of federal policy shift that could transform the industry's capital dynamics.