Zuanic Gives Overweight Ratings on Financial Firms

Cannabis analyst Pablo Zuanic of Zuanic & Associates has initiated coverage on two cannabis financial firms with overweight ratings.

Zuanic published reports on both Chicago Atlantic Real Estate Finance Inc. (NASDAQ: REFI) and NewLake Capital Partners (OTC: NCLP) with positive opinions. Overall, the analyst believes the cannabis industry outlook is bright.

In the announcement for initiating coverage, Zuanic “conservatively” estimated that legal cannabis sales would reach $40 billion by 2027, which equates to an almost 10% compound annual growth rate, driven by more states launching adult-use markets.

“At the federal level, we expect reform to be gradual (i.e., we do not expect full nationwide legalization), with potentially cannabis being rescheduled in 2024 (from schedule I to the III under the Controlled Substances Act),” the report noted.  “The latter would provide much needed tax relief (operators now pay income tax on gross profits) at least, but it may also come with DOJ safe harbor language that improves capital access.”

In addition, Zuanic thinks that the Federal Reserve will begin cutting rates, which would be especially positive for these companies.

Chicago Atlantic

The report noted that Chicago Atlantic Real Estate Finance, Inc. (REFI) is an externally managed commercial mortgage real estate investment trust that went public in December 2021. REFI’s loan portfolio primarily comprises senior loans to state-licensed operators in the cannabis industry secured by real estate, equipment, receivables, licenses, and/or other assets of the borrowers.

Zuanic’s analysis stated that REFI has several competitive advantages, such as offering shorter loan duration and accepting lower loan-to-value (LTV) ratios.

“Debt leverage is only 23% (debt of $63 million; equity of $276 million), and the company has access to another $37 million in its revolving credit facility. The current dividend is well protected (122% coverage) and represents north of 12% yield. The stock trades at par,” the report highlighted.

The analyst also expects REFI’s loan book to grow roughly 10% a year. That combined with the dividend yield, plus a more favorable outlook for REITs in general by mid-2024, add up to the overweight rating. Zuanic did not provide a price target for the stock.


NewLake Capital Partners

NewLake Capital Partners is a provider of real estate capital to cannabis operators that describes itself as a “triple-net lease REIT (100% leased) that acquires industrial and retail properties through sale-leaseback transactions, third-party purchases and build-to-suit projects.”

Zuanic pointed out that the company hasn’t expanded its portfolio in recent quarters, and that adjusted funds from operations (AFFO) per share has been essentially flat. Instead, the company pulled other levers, such as buying back more than $9 million dollars in stock – and it could buy another $11 million through December 2024.

Like REFI, NewLake pays a 12% dividend yield. It also trades at a 30% discount to net asset value (NAV), which Zuanic attributes to its OTC status and low liquidity, as well as the stock’s relative newness versus competitor Innovative Industrial Properties (NYSE: IIPR).

According to Zuanic, “The discount to non-cannabis industrial peers is significant, and unwarranted, in our view. Importantly, IIPR trades at a 22% premium to NAV and cannabis (mortgage REIT) REFI trades at par.”

The firm identified four factors that are “driving above average returns” for NLCP’s shareholders:

Dividend yield of 12%
AFFO growth of at least 10% per annum
Narrowing of the discount to NAV
An “overall REIT rally” in the second half of 2024, as the Fed begins to cut rates.

The Zuanic report highlighted NewLake’s committed capital of $427 million, made up of 31 properties in 12 states. The portfolio (cultivation 92%, retail 8%) had a 14.2-year weighted average lease term and 12.2% weighted average yield. The net real estate is 100% rented at $375 million as of the third quarter of 2023.


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