There hasn't been a lot of good news lately that would raise the shares of marijuana-connected stocks. Due to a continued glut of product, rising labor costs, and high taxation, few cannabis retailers are profitable.
In late April, a bipartisan group of senators and representatives reintroduced a slightly altered version of the Secure and Fair Enforcement (SAFE) Banking Act, which would make banking and finance easier for cannabis companies. Although previous versions have passed the House, none have been approved by the Senate yet.
A few more states have passed laws allowing adult sales this year, most recently Minnesota. However, that state won't begin allowing adult-use sales until 2025, and among some of the other states that did begin adult-use sales this year, only Missouri is considered likely to top $1 billion in cannabis sales in 2023.
The lack of positive news has driven down cannabis stocks, but that could be a good thing for potential investors. If you focus on solid companies that are already profitable, you can build positions in them before cannabis stocks rebound once industry headwinds subside.
Consider companies such as cannabis retailer Green Thumb Industries (GTBIF 2.46%) and cannabis-focused real estate investment trusts (REITs) Newlake Capital Partners (NLCP) and Innovative Industrial Properties (IIPR 0.06%). All three show good financials and carry little debt, qualities that give them better chances of being long-term survivors. They also appear to be priced competitively, with forward price-to-earnings (P/E) ratios below 30.
Data source: YCharts.
Green Thumb: Outstanding in its field
Green Thumb Industries' stock is down about 8% this year, and the company isn't immune to the slowdown that has affected cannabis retailers. Its revenue fell 4% sequentially in the first quarter to $248.5 million, though that did represent a rise of 2% year over year. Its profits are suffering a bit, too: It reported net income of $9 million, or $0.04 per share, down from $28.9 million, or $0.12 per share, in the year-ago period. However, the company has turned a profit for 10 consecutive quarters, something no other U.S. cannabis retailer can say.
Green Thumb operates in 14 markets in the U.S. and just opened its 80th retail location, but its growth has been deliberate. It is No. 3 among U.S. cannabis retailers in terms of quarterly revenue behind Curaleaf and Trulieve Cannabis, but it hasn't had to overspend to get where it is.
Data source: YCharts.
NewLake staying afloat nicely
NewLake Capital Partners is a relatively small cannabis REIT. It owns 32 properties across 12 states, incorporating 1.7 million square feet of rentable space. Its shares are down 22% so far this year. While some of its tenants may be struggling to increase their revenues and operate profitably, NewLake is not. In the first quarter, the company reported revenue of $11.4 million, up 12.3%, year over year.
Funds from operations (FFO) and adjusted funds from operations (AFFO) are more accurate metrics of profitability for REITs than net income. NewLake reported first-quarter FFO of $9.5 million, compared to $7.9 million in the same period a year ago, and AFFO of $9.9 million, up 19.6% year over year.
NewLake also offers a high-yielding dividend. At $0.39 per share per quarter, its current yield is around 12.7%. The company has increased its payouts by 225% over the past three years, and given that its AFFO payout ratio is 86% -- a level that's considered conservative for a REIT -- there's room for management to raise it further. And with its average lease length remaining of 14.6 years, the company has stable cash flows.
There are two legitimate concerns about NewLake. As of the end of 2022, Curaleaf accounted for about 23% of the company's annualized rental revenue, so NewLake could use more diversification. NewLake also had one tenant that didn't pay rent in Q1, but is said to be working on a resolution of the matter. NewLake is healthy enough to continue to grow. It bought one property in Missouri in the quarter and committed to fund $16.2 million in tenant improvements.
Innovative is shoring up any weaknesses
Innovative Industrial Properties' shares are down more than 29% so far this year. It is the largest cannabis REIT, with 108 properties across 19 states, representing roughly 8.9 million square feet of rentable space.
Like NewLake, the company continues to increase its revenue and FFO. In the first quarter, it reported revenue of $76.1 million, up 18% year over year. AFFO rose 18% to $63.4 million, and FFO rose 18% to $57.5 million. Its leases have an average term remaining of 15.1 years, giving the company cash-flow stability.
Innovative has increased its dividend by about 70% over the past three years, and its current quarterly payout of $1.80 gives it a yield of about 10%. Its AFFO payout ratio is 80%, even lower than NewLake's.
The company collected 98% of the rent it was owed in the latest quarter, but it did have three smaller tenants who didn't pay their rents; Innovative used their security deposits to make up the difference, so that's a concern in the future. Innovative does have the advantage of tenant diversity, as no single tenant is responsible for more than 14% of its rental revenue as of the end of 2022.
The REIT sold four properties in California for $16.1 million. They were leased to affiliates of Medical Investor Holdings. However, Innovative has an eye on growth, even in a difficult market. It bought an industrial property in Ohio for $20.1 million and a cultivation facility in Pennsylvania for $15 million. It also agreed to amend lease agreements with Ascend Wellness, PharmaCann, and Goodness Growth to fund a total of $34 million in property improvements.
