Nova Net Lease (NNL), a Canadian real estate investment trust focused on the cannabis industry, reported strong financial performance for the second quarter of 2024, ending June 30th. The Toronto-based company saw a notable increase in total revenue, reaching $392,665, compared to $388,656 in the same period last year. This growth was driven by increased rental revenue, reaching $494,004 for the quarter.
The most significant improvement was in net income, which reached $1.81 million, a substantial turnaround from a net loss of $707,592 in the same period of 2023. This turnaround is attributed to a $1.68 million gain on Class B Units, a stark contrast to a $480,000 loss in the corresponding quarter of 2023.
Despite these positive financial results, Nova Net Lease faces challenges regarding its cash flow. As of June 30th, the REIT had a working capital deficit of $168,008, including the liability related to the Class B Units. Excluding this liability, the working capital was positive at $551,992.
In response to these cash flow concerns, the company implemented a cash retention plan. This plan includes suspending monthly distributions to investors, reducing executive compensation, eliminating cash compensation to the board of trustees, and terminating an employee.
Nova Net Lease expects to have sufficient cash to cover operating costs and debts in the foreseeable future. However, management acknowledges two areas of concern. First, the available cash is currently less than the total accounts payable and liabilities. Second, cash levels will remain low until the REIT achieves two consecutive quarters of positive cash flow, a requirement for the release of funds held in reserve by a lender. Management believes this requirement has been met and is awaiting the lender’s approval to release the reserve funds.
While the company’s financial performance is positive, the ongoing cash flow challenges highlight the unique complexities of the cannabis industry, especially for real estate investment trusts operating within it.
