Decisive Investment Growth And Federal Legislation Poised To Drive Profitability

Key Takeaways

• Strong loan pipeline and ample liquidity position the company for future revenue growth and earnings stability through strategic investments.
  
• Focus on fixed-rate loans and improved credit quality reduces risk and boosts earnings reliability, with potential revenue growth from legislative changes.
  
• Regulatory uncertainty and market volatility in the cannabis sector, along with interest rate and liquidity risks, could affect revenue growth and portfolio quality.

Catalysts

Chicago Atlantic Real Estate Finance, Inc.

• The company's pipeline of potential loans and investments has grown to $560 million, indicating strong future revenue growth opportunities as this capital is deployed. This is poised to positively impact future earnings.
  
• With liquidity in excess of $75 million and recent issuance of a $50 million unsecured term loan, the company is well-equipped to fund new investments and take advantage of market opportunities, likely aiding in revenue expansion and strengthening net margins.
  
• The strategic shift to a higher percentage of fixed-rate loans from floating-rate ones, in response to the declining rate environment, suggests a stabilization in interest income, which can positively impact net margins and earnings stability.
  
• Improved portfolio credit quality and successful management of 2024 loan maturities, including extensions and recoveries, signal reduced risk and the potential for increased earnings reliability and improved net margins in the future.
  
• Efforts to focus on operators in limited license states transitioning from medical to adult use could offer significant revenue growth potential, particularly if federal rescheduling or supportive legislation like SAFE Banking progresses, impacting both revenues and net margins positively.

Chicago Atlantic Real Estate Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chicago Atlantic Real Estate Finance's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 67.8% today to 68.4% in 3 years time.
• Analysts expect earnings to reach $41.5 million (and earnings per share of $2.07) by about November 2027, up from $38.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2027 earnings, up from 8.2x today. This future PE is lower than the current PE for the US Mortgage REITs industry at 10.6x.
• Analysts expect the number of shares outstanding to grow by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Chicago Atlantic Real Estate Finance Future Earnings Per Share Growth

Risks

• The volatility and regulatory uncertainty in the cannabis market, highlighted by the failed legalization vote in Florida, could impact investment opportunities and potential revenue growth.
  
• Exposure to interest rate fluctuations, despite efforts to manage interest rate risk, could still pose challenges to maintaining stable revenue and net margins if rates decline further.
  
• The low visibility of cannabis market trends across the fragmented U.S. markets could make it difficult to consistently identify strong operators, potentially affecting portfolio quality and earnings.
  
• Liquidity risks might arise from the reliance on external financing, such as the unsecured term loan, which carries a relatively high fixed interest rate of 9%, impacting net margins if funding costs rise.
  
• The ongoing challenge of managing non-performing loans, like Loan #9 on nonaccrual status, could lead to credit quality issues and impact future earnings and net margins if not resolved efficiently.

Valuation

• The analysts have a consensus price target of $18.4 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 $22.0, 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 2027, revenues will be $60.7 million, earnings will come to $41.5 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 5.9%.
• Given the current share price of $16.04, the analyst's price target of $18.4 is 12.8% 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.