Analyst Highlights Asset-Backed Cannabis Loans In Chicago Atlantic's REFI With Overweight Rating

Zuanic & Associates (Z&A) recently initiated coverage of Chicago Atlantic Real Estate Finance Inc. REFI with an Overweight rating.  Chicago Atlantic is an externally managed commercial mortgage real estate investment trust.

"REFI is among the few active and sizeable publicly traded capital providers to the growing cannabis industry, benefitting from a supply-demand imbalance of capital that allows for YTM rates in the high teens, in the case of mortgage REITs," reads Z&A's latest report. 

• With the ability to fund a $350 million loan book and a history of closing $2 billion in loans, including syndications, REFI is well-equipped for growth in the burgeoning cannabis sector.
• REFI's core business involves providing senior loans to state-licensed cannabis industry operators, with collateral including real estate, equipment receivables, and other assets.
• The trust is managed by Chicago Atlantic REIT Manager LLC, a subsidiary of Chicago Atlantic Group LP, responsible for management fees and incentive compensation.

REFI's Position In The Cannabis Industry

REFI is distinguished in the cannabis market as one of the few major publicly traded capital providers. Its unique position is a result of a capital supply-demand imbalance, enabling it to offer high Yield-to-Maturity (YTM) rates.

The sector currently suffers from limited banking access due to its federal legal status, despite recreational sales legalization in 24 states.

Z&A anticipates legal cannabis sales to reach $40 billion by 2027, growing at a nearly 10% CAGR. They also foresee gradual federal reform, including potential rescheduling of cannabis, which could significantly improve industry economics and expand REFI's investment opportunities.

Competitive Advantage And Financial Health

REFI's competitive edge is marked by its strategy of offering shorter loan durations and lower loan-to-value ratios. The company's proficiency in leading loan syndication deals, keeping half of the origination fees, further enhances its market stance.

The report highlights REFI boasts a modest debt leverage of 23% and has access to an additional $37 million through a revolving credit facility. Its dividend is robustly covered (122%) and yields more than 12%.

According to Pablo Zuanic, senior analyst at Z&A, REFI stands out over its direct competitor AFC Gamma Inc. AFCG, thanks to its consistent performance and solid financials.

Furthermore, REFI is well-positioned to bounce back from a recent loan issue by selling the associated asset at a value exceeding its book price.

Future Prospects And Growth Potential

• Looking ahead, REFI is projected to grow its loan book by 10% annually.
• This growth, combined with a dividend yield above 12% and a favorable future outlook for REITs, particularly with potential interest rate reductions by the Federal Reserve in mid-2024, underpins Zuanic & Associates' positive stance on REFI.

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