Cannabis Lending Expansion Will Unlock Opportunities Amid Credit Risks

Key Takeaways

• Continued regulatory barriers for cannabis operators enable pricing power and high yields, supporting strong net interest margins and profitability.
  
• Strategic positioning and portfolio diversification allow for steady growth, scalable earnings, and resilience against credit losses in the evolving cannabis finance market.
  
• Heavy concentration in cannabis lending, reliance on smaller borrowers, and income volatility from nonrecurring fees heighten regulatory, credit, and earnings risks amidst increasing competition.

Catalysts

Chicago Atlantic Real Estate Finance, Inc.

• The significant expansion in Chicago Atlantic's loan origination pipeline-from $462 million to $650 million-reflects ongoing robust demand for specialized real estate lending in the cannabis sector, amplified by M&A and refinancing activity, which is likely to support future revenue growth as more loans are deployed at attractive yields.
  
• The continued undersupply of credit for cannabis operators due to regulatory barriers for traditional banks allows Chicago Atlantic to maintain pricing power and command high risk-adjusted loan yields (noted at 16.8% weighted average), which should sustain elevated net interest margins over the long term.
  
• The company's rigorous direct-originations model and foothold as a preferred partner in limited-license jurisdictions positions it to benefit from the anticipated future regulatory liberalization and structural growth of legal cannabis markets, leading to an expanding borrower base and scalable recurring earnings.
  
• Chicago Atlantic's strong liquidity position and access to multiple funding sources-including an extended credit facility-enable it to redeploy repayments quickly and capture new lending opportunities, contributing to steady portfolio growth and supporting distributable earnings and dividend capacity.
  
• Ongoing resilience in specialty finance demand and demographic-driven shifts toward new asset classes ensure that the company's well-diversified, actively managed portfolio is poised to deliver above-peer returns and maintain low credit losses, directly benefitting long-term profitability and book value stability.

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 shrink from 67.2% today to 52.1% in 3 years time.
• Analysts expect earnings to reach $31.5 million (and earnings per share of $1.55) by about August 2028, down from $38.1 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 17.0x on those 2028 earnings, up from 7.9x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 13.5x.
• 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 6.78%, as per the Simply Wall St company report.

Chicago Atlantic Real Estate Finance Future Earnings Per Share Growth

Risks

• Overconcentration in the cannabis sector and reliance on smaller private operators exposes Chicago Atlantic to elevated regulatory, market, and default risks if cannabis operators face financial pressure or if federal legalization enables traditional lenders to enter the market, potentially depressing lending rates and revenues.
  
• A significant portion (59.3%) of the loan portfolio is in floating rate loans benchmarked to the prime rate; prolonged or steep declines in interest rates would reduce net interest spreads and compress net margins.
  
• Rising competition from alternative lenders and potential entrants (including mainstream banks if regulations change or federal legalization advances) may drive down yields, diminish credit underwriting advantages, and pressure both revenue growth and earnings quality.
  
• The company's increased leverage (rising from 28% to 39% of book equity Q/Q) and growing CECL credit loss reserves (from 0.8% to 1.1% of outstanding principal in one quarter), combined with a loan placed on nonaccrual status, indicate rising portfolio risk, which could lead to higher credit losses and impact book value and distributable earnings.
  
• Heavy dependence on nonrecurring income sources such as prepayment, make-whole, and structuring fees (which drove a significant portion of quarterly net interest income growth) increases earnings volatility and reduces predictability of long-term revenue streams.

Valuation

• The analysts have a consensus price target of $17.625 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 $14.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $60.4 million, earnings will come to $31.5 million, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $14.35, the analyst price target of $17.62 is 18.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.