The cannabis industry has seen explosive growth over the past decade. Limited access to funding through traditional lenders like banks has helped create a unique opportunity for marijuana-focused real estate investment trusts (REITs) using sale-leaseback agreements.

Until recently, Innovative Industrial Properties (IIP) was the only publicly traded REIT to specialize in leasing real estate to the cannabis industry. That was until the initial public offering of NewLake Capital (NLCP -0.37%) in August 2021. Given the tremendous growth IIP achieved, is there a chance NewLake Capital could follow suit? Here's a closer look at whether you should invest in this budding cannabis REIT right now.

Dollar sign with marijuana leaf and arrow going up.

Image source: Getty Images.

A closer look at NewLake Capital Partners

Founded in 2019, NewLake Capital Partners is a small but growing REIT, having just 29 properties under management in 11 states. Like IIP, NewLake uses a sale-leaseback model, purchasing existing industrial real estate for the cultivation, processing, or sale of marijuana, leasing it back to the licensed operator on a long-term net lease. This business model has been a proven way to provide liquidity to operators who may not have alternative sources of funding because federal laws prohibit banks from lending to the cannabis industry.

NewLake targets investments in limited-license jurisdictions, which reduce financial and operational burdens for the operators. The majority of its properties, or about 65%, are leased to popular publicly traded marijuana companies like Columbia Care, Acreage Holdings, Truelieve Cannabis, Curaleaf, and Cresco Labs, among several others. Its portfolio has remained 100% leased since its inception in 2019.

Where is NewLake headed?

In 2021, NewLake more than doubled the size of its portfolio thanks to a merger that added 19 properties and $8.5 million in rental revenue in 2021. This was a clear driver for a monumental year that achieved a 142% growth in revenue, totaling $28.2 million. Net operating income (NOI) and funds from operations (FFO), two important metrics that illustrate a REITs profitability, both went from a net loss in 2020 to net positive in 2021.

NewLake is in a strong financial position for growth with just $2 million in debt outstanding and $127 million in cash and cash equivalents. Something I'm watching carefully is the company's dividend payout ratio. Right now, NewLake is paying out 103% of its FFO in dividends. This isn't unheard of in the world of REITs. IIP at the end of 2018 had a payout ratio of 100%. However, high payout ratios like this could be unsustainable if NewLake's growth doesn't continue at the same rate we're seeing today.

Industrial warehouse growing marijuana.

Image source: Getty Images.

There are certainly concerns about its potential to grow, as NewLake is getting a much later start than IIP, meaning it's facing more competition. Legislative concerns are also making investors nervous about the viability of growth for REITs in this industry. The federalization of cannabis or reformation of banking laws from the SAFE Banking Act could impact cannabis REITs' business model. One important bill called the MORE Act, which essentially would legalize marijuana nationwide, passed the House of Representatives this week, although it's unlikely it will clear the Senate.

Investors often look back at share prices for IIP at the time of its IPO and wish they had invested when the company was young. NewLake could be a second chance for those who missed out on the huge gains. Share prices have fallen 15% since the IPO, not necessarily at the fault of the company; rather, market volatility and concerns surrounding the legalization of cannabis have pushed it down. Today, NewLake trades for about 22 times its FFO, meaning it's well valued for its performance. Due to its 5.2% dividend yield and growth potential, I think this is a great time to invest in this growing cannabis REIT.