REFI Stock: 11.7%-Yielding Alternative REIT Hits Fresh High
December 23, 2024
REFI Stock at Record Levels But Still Has 24% Upside
In the income spotlight today is REFI stock.
Chicago Atlantic Real Estate Finance Inc (NASDAQ:REFI) recently hit a record high, but the outlook remains even better.
In the lead-up to the 2020 U.S. presidential election, the Democrats said they were the best option for getting cannabis legalized on a federal level. They took the White House, regained control of the House, and gained control of the Senate. Despite their optimism, legalization never happened.
President-elect Donald Trump favors leaving it up to individual states to decide whether to legalize or not. That’s great, but that still means that cannabis will remain illegal on the federal level, which means that cannabis companies cannot access traditional financial institutions for capital. It’s also why cannabis stores only take cash.
However, Trump has said that he supports rescheduling cannabis from Schedule I to Schedule III of the Controlled Substances Act, which acknowledges its medical value. He also supports providing banking access to the cannabis industry. (Source: “What Can We Expect From Trump On Cannabis Reform?,” Forbes, November 18, 2024.)
Will that happen?
Well, it’s difficult to predict, but politicians like winning elections and doing what their constituents want. Today, over 24 states have legalized recreational cannabis and 38 have legalized medical cannabis.
And a whopping 66% of American voters (75% of democrats, 67% independents, and 54% of republicans) are in favor of legalizing marijuana at the federal level for adults over the age of 21. (Source: “High Support for Legalizing Marijuana at the Federal Level,” Data For Progress, April 19, 2024.)
That’s a lot of voters who have money to spend and potential tax dollars. In 2024, the U.S. cannabis market (adult-use and medical sales) was valued at around $32.1 billion. It’s expected to hit $58.0 billion by 2030, expanding at a compound annual growth rate (CAGR) of 10%. (Source: “Earnings Presentation Q3 2024,” BW LPG Ltd., December 2, 2024.)
Even if President-elect Trump does get banking legislation passed, there will still be cannabis companies that prefer to deal with alternative lenders. This includes mortgage real estate investment trusts (mREITs). And Chicago Atlantic Real Estate Finance is one mREIT that is taking advantage of the current weakness and uncertainty in the cannabis industry.
Chicago Atlantic Real Estate Finance is a commercial real estate finance company that originates, structures, and invests in first mortgage loans and alternative structured financings secured by commercial real estate properties. (Source: “About Us,” Chicago Real Estate Finance Inc, last accessed December 5, 2024.)
The company’s loan portfolio is primarily comprised of senior secured loans to state-licensed operators and property owners in the cannabis industry. Since 2019, it has sourced and closed over $2.3 billion in credit facilities and closed more than 80 cannabis loans.
Chicago Atlantic’s portfolio is diversified across operators, geographies, and asset types. As of October 31, 2024, the rate type of its $362.3-million portfolio was as follows:
- 57% of its portfolio was floating rate with a floor less than 8.0%
- 5.8% had a floating rate with a floor of greater than or equal to 8.0%
- 37.2% was fixed rate
- The weighted average yield to maturity was ~18.3%
The cannabis landscape has changed a lot over the years. As noted above, the U.S. cannabis industry is estimated to be worth $32.1 billion in 2024 and is projected to grow to $58.0 billion by 2030.
According to Chicago Atlantic, the current value of the U.S cannabis debt market is estimated to be approximately $11.0 billion. With its closed cannabis loans to date of $1.98 billion, the company has captured approximately 17% of the current U.S. cannabis debt market.
Now, with projected sales of $58.0 billion in retail sales by 2030, should Chicago Atlantic simply maintain its current debt market share of 17%, its private opportunity could grow to approximately $3.5 billion.
It’s well on its way. In October, the mREIT announced that it had entered a $50.0-million unsecured term loan from two institutional private lending platforms to fund the company’s future investments. (Source: “Chicago Atlantic Real Estate Finance Closes on $50 Million Unsecured Term Loan to Fund Deployment of New Investments,” Chicago Atlantic Real Estate Finance Inc, October 23, 2024.)
Egan-Jones, a national statistical rating organization, assigned a rating of BBB+ to both Chicago Atlantic and the senior unsecured term loan.
Commenting on the new loan, Peter Sack, the mREIT’s co-chief executive officer, said, “This unsecured note is the latest example of our ability to source accretive financing that further enhances our operational liquidity to pursue additional opportunities within our active originations pipeline.”
Another Solid Quarter
For the third quarter ended September 30, 2024, Chicago Atlantic announced net interest income of $14.5 million, up 5.8% over the $13.7 million recorded in the same period last year and up 10% from $13.2 million in the second quarter.
The company reported net income of approximately $11.2 million, or $0.56 per diluted share, up 13% on an annual basis and 21.7% on a sequential basis. Its distributable earnings increased 6.6% on an annual basis and 12% on a sequential basis to $11.2 million, or $0.56 per share.
At the end of the third quarter, Chicago Atlantic has a total loan principal outstanding of $362.3 million, across 29 portfolio companies, with $6.0 million unfunded commitment.
The portfolio weighted average yield to maturity was approximately 18.3%, compared with 18.7% as of June 30, 2024, primarily due to repricing.
Commenting on the results, Sack said, “We have managed our portfolio and its maturities very well throughout 2024 with extensions, modifications and refinancings while improving credit quality and loan coverage.”
He added, “With the increased liquidity generated by our recent unsecured note, we expect to put more of this accretive capital to work soon. Chicago Atlantic remains at the forefront of this industry with the largest platform focused on cannabis, and we expect to continue to lead as a preferred capital partner.”
Will REFI Stock Pay Out a Special Dividend in Q4?
Chicago Atlantic has elected to be taxed as a real estate investment trust (REIT), which means it has to distribute at least 90% of its taxable income to its stockholders. In October, REFI stock paid a regular cash dividend of $0.47 per common stock for the third quarter. This works out to an annual distribution of $1.88 per share, for a forward dividend yield of 11.75%.
To maintain its status as a REIT, Chicago Atlantic sometimes needs to pay additional dividends over and above the regular quarterly dividend amount to meet its annual taxable income distribution requirements.
This led to the company paying a special cash dividend of $0.29 per share in the fourth quarters of 2022 and 2023. Investors holding REFI stock will find out if they’ll get a fourth-quarter special dividend when it announces its full-year results in early 2025. (Source: “Dividends,” Chicago Atlantic Real Estate Finance Inc, last accessed December 5, 2024.)
REFI Stock Hits Record High
Ultra-high-yield dividend stocks are typically tied to companies whose shares are depressed. That’s because a company’s dividend yield and share price have an inverse relationship.
Fortunately, this isn’t the case with Chicago Atlantic.
REFI stock hit an all-time record intraday high of $16.23 on December 3. On December 5, it closed at $16.22. That puts REFI stock up:
REFI stock hit an all-time-record, intraday high of $16.27 on December 10. And it continues to trade near those levels, now up:
- 8.7% year to date
- 13.5% year over year
- 34%, with dividends reinvested, since we first looked at it back in December 2022
Despite the big gains, Wall Street sees REFI stock hitting fresh highs over the coming year, with analysts providing a 12-month share price target of $20.00, which points to potential gains of 24%.
Chart courtesy of StockCharts.com
The Lowdown on REFI Stock
Chicago Atlantic Real Estate Finance Inc continues to be an excellent REIT operating in the highly fragmented U.S. cannabis sector. Because of current laws, cannabis companies have to turn to alternative lenders like Chicago Atlantic.
What are the benefits?
Well, mREITs like Chicago Atlantic can charge higher interest rates and have shorter loan durations and the ability to upsize.
Thanks to state and federal legislation for both recreational and medical cannabis use and growing consumer adoption, the demand for financing is expected to climb significantly. And that will require huge capital expenditures by operators. This makes REFI stock a no-brainer in the cannabis mREIT space.
Moreover, cannabis being illegal on the federal level has not dissuaded conservative Wall Street from taking a big piece out of Chicago Atlantic. A total of 133 Institutional holders have a 37.48% stake in Chicago Atlantic. BlackRock Inc is the biggest holder, with a 7.5% stake, followed by Vanguard Group Inc (4.99% stake) and Fielder Capital Group LLC (3.16%).
I suspect that more institutional investors will step up over the coming quarters. The outlook for debt financing in the medical and recreational cannabis industry remains extremely robust. By 2030, U.S. sales of cannabis are expected to rival sales of spirits and wine.
Thanks to its strong pipeline in existing states and a growing number of new states that have recently added adult use, or will soon do so, Chicago Atlantic is well-positioned for the balance of the year and into 2025.
And that bodes well for the mREIT’s earnings and REFI stock and its dividends.
