Chicago Atlantic REFI (NASDAQ:REFI) stands out in the cannabis finance sector, receiving an “Overweight” rating from senior analyst Pablo Zuanic at Zuanic & Associates. With a near 14% dividend yield, REFI offers an attractive, less volatile way to gain exposure to the cannabis market.
The company's loan portfolio boasts a yield to maturity (YTM) of over 18%, indicating the potential average annual return from its loans if held until repayment. Furthermore, with 4.6% of loans in non-accrual status—meaning borrowers have stopped making payments—REFI demonstrates robust risk management.
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Loan Portfolio And Yield
REFI's new loans, up 32% year-over-year, highlight its strong growth potential in year-to-date funding. This growth is supported by a $559 million pipeline, with additional upside from potential cannabis legalization in states like Pennsylvania and Virginia, which could boost demand for financing.
The portfolio includes loans across diverse markets, with top states such as Maryland (14%), Pennsylvania (12%) and Missouri (10%) representing a significant portion of the book. Its 1.2% expected credit loss (CECL) reserve and ongoing reversals of provisions signal the stability of its loan book.
"We see REFI's dividend as secure, with 118% coverage in Q3 and a pipeline that should sustain growth," Zuanic stated. "The stock offers one of the most compelling risk-adjusted returns in the cannabis sector today."
Leveraging Credit Facilities And Operational Leverage
REFI has room to increase its leverage, with its gross debt-to-equity ratio at 18% as of September 2024.
The company has tapped into only a portion of its $150 million revolving credit facility, leaving significant room to expand.
According to Zuanic, REFI is well-positioned to capitalize on the constrained capital environment for cannabis operators.
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Loan Book Risk
The loan book's risk ratings show that 71% of the portfolio is rated 1-2, indicating low to moderate risk. REFI's exposure to loans with real estate collateral coverage of less than 1x has increased to 39% as of Q3 2024, up from 19% at the end of 2022.
However, Zuanic notes that 17% of the book is in markets with challenging economics. The company's focus on high-quality borrowers, including those in states like Michigan, Maryland and New York, underpins the portfolio's stability.
Comparisons To Sector Peers And Market Position
Among other cannabis capital providers AFCG (NASDAQ:AFCG), IIPR (NYSE:IIPR), New Lake Capital Partners (OTC:NLCP) and (NASDAQ:REFI) stand out for their lower non-accruals and stronger growth outlook.
While AFCG has a similar dividend yield, REFI's loan book is in better shape, with non-accruals at less than 5% compared to AFCG's higher rate.
Additionally, REFI’s mortgage REIT competitors, like IIPR and NLCP, offer lower yields and trade at premiums to their book values. By contrast, REFI trades at a 6% premium to book value, with its 18% YTM making it one of the most compelling investment opportunities in the cannabis finance space.
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Strong Dividend Yield And Earnings Power
REFI’s dividend yield remains one of the highest in the sector, with the regular dividend of 47 cents per share well-covered by distributable earnings, which came in at 56 cents per share in Q3 2024—up 12% sequentially.
Zuanic estimates that REFI will continue to pay a special dividend of 29 cents in December, bringing the total annual dividend to $2.17 per share, or 13.6% yield on the current share price of $16.01.
This represents a compelling yield compared to the 10-year Treasury yield of 4.15%, positioning REFI as an attractive choice for income-focused investors.
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