A $490 Million Pipeline Will Open Future Opportunities

Key Takeaways

• Focus on operators in limited license jurisdictions and capitalizing on new financing could drive growth and enhance revenue and net margins.
  
• Strategic position with significant liquidity and a robust pipeline enables accelerated loan originations, stabilizing revenue against interest rate fluctuations.
  
• Challenges in the cannabis industry, interest rate fluctuations, credit risks, and high-interest expenses threaten Chicago Atlantic Real Estate Finance's profitability and earnings.

Catalysts

Chicago Atlantic Real Estate Finance, Inc.

• Chicago Atlantic Real Estate Finance's focus on deploying capital with consumer and product-focused operators in limited license jurisdictions could drive future growth, potentially enhancing revenue and earnings as these markets mature.
  
• The company has increased its senior secured credit facility and secured a new $50 million unsecured term loan, positioning it to capitalize on new opportunities, which could result in increased revenue and higher net margins.
  
• The successful restructuring of loan #9, currently on nonaccrual, offers potential upside if returned to accrual status, impacting overall credit quality and positively affecting net margins and earnings.
  
• With a robust $490 million pipeline across the Chicago Atlantic platform and significant current liquidity, the company is strategically positioned to accelerate loan originations, which could lead to higher revenue.
  
• The increased proportion of the loan portfolio insulated from interest rate declines through fixed rate loans or those with floors could stabilize revenue and protect net interest income in varying interest rate environments.

Chicago Atlantic Real Estate Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chicago Atlantic Real Estate Finance's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 66.7% today to 65.1% in 3 years time.
• Analysts expect earnings to reach $41.4 million (and earnings per share of $1.94) by about March 2028, up from $37.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.7x on those 2028 earnings, up from 8.8x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 12.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Chicago Atlantic Real Estate Finance Future Earnings Per Share Growth

Risks

• The U.S. cannabis industry is facing significant challenges, including the failure of Florida's adult-use ballot initiative and lack of prioritization of federal cannabis reform, which could negatively impact revenue as pricing pressures in some markets contribute to lower equity values.
  
• Interest rate declines have reduced the weighted average yield to maturity of their loan portfolio, potentially impacting their net margins and overall profitability.
  
• There is uncertainty surrounding economic factors such as tax policy, tariffs, inflation, and Federal Reserve interest rate actions, which could adversely affect earnings if they do not manage their interest rate exposure effectively.
  
• The handling of Loan #9, which is on nonaccrual status, along with the need for operational and balance sheet restructuring, suggests higher credit risks that could impact net margins if not resolved promptly.
  
• The decrease in net interest income and increase in interest expense due to new unsecured term notes bearing a high fixed interest rate could compress net margins and adversely affect overall earnings.

Valuation

• The analysts have a consensus price target of $17.6 for Chicago Atlantic Real Estate Finance based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $16.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $63.6 million, earnings will come to $41.4 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $15.52, the analyst price target of $17.6 is 11.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.