Benzinga - by Nicolás Jose Rodriguez, Benzinga Staff Writer.
With increasing state-level legalizations, real estate investment trusts (REITs) such as Innovative Industrial Properties, Inc. (NYSE: IIPR) NewLake Capital Partners, Inc. (OTCQX: NLCP) and Chicago Atlantic Real Estate Finance, Inc. (NASDAQ: REFI) are funds that provide capital, navigating the dissonance between state and federal laws.
Brad Thomas, real estate analyst and author of "REITs For Dummies," discusses the valuation of these stocks and the role REITs play in the cannabis industry.
The aggregate financial engagement (considering committed capital and equivalent significant activities) between Innovative Industrial Properties and Chicago Atlantic is approximately $4.5 billion.
Industrial Cannabis Properties Growth Thomas explained Innovative Industrial Properties expanded its property count from 11 to 108 from 2018 to 2023. The company specializes in long-term, triple-net lease agreements and increased its committed capital from $167.4 million to $2.4 billion during this period.
Its FFO increased by 31% in 2021 and 24% in 2022, yet the P/FFO ratio is currently 13.07x, compared to the industrial average of 17.42x.
This means that despite the cannabis real estate fund showing strong financial performance with significant growth in Funds From Operations (FFO), it is still valued lower by the market than similar industrial properties, suggesting a potential undervaluation or investment opportunity.
NewLake’s Financial Performance Established in 2019, NewLake Capital Partners has quickly emerged as a key player in the cannabis real estate sector. With a market capitalization of $390.7 million, the firm manages a fully leased portfolio of 31 properties, featuring a weighted average lease term (WALT) of 14.1 years and a weighted average yield (W.A. Yield) of 11.7%.
Despite these indicators, it trades at a price to funds from operations (P/FFO) ratio of just 9.44x, highlighting a valuation disparity within the sector and suggesting a potentially attractive investment opportunity.
Chicago Atlantic's Strategic Niche Chicago Atlantic, formed in 2019, uniquely positions itself within the cannabis financing landscape by specializing in senior secured loans.
Thomas noted this mortgage REIT has managed to source and close over $2.1 billion in loans since its inception, addressing the capital needs of cannabis operators restricted by federal banking regulations. With an outstanding principal balance of $377.6 million and a gross portfolio yield of 19.4%, Chicago Atlantic's focused approach mitigates risks through collateral-backed securities and capitalizes on high-return opportunities within the industry.
In that REFI is a relatively new mortgage REIT there is limited historical data available for analysis.
However, Thomas explained the company saw an increase in its distributable cash per share rising from $2.10 in 2022 to $2.26 in 2023. Looking ahead, analysts anticipate a recovery of 4.4% by 2025.
Financially, REFI is currently valued with a price-to-earnings (P/E) ratio of 7.15x, notably lower than its primary competitor, AFC Gamma (NASDAQ: AFCG), which has a P/E ratio of 8.43x, and slightly below the mortgage REIT industry average of about 8.39x.
This more favorable P/E ratio suggests that REFI's stock might be undervalued compared to its peers, potentially offering a more attractive yield.
According to Thomas the current stock price also reflects a substantial earnings yield of 14.28% and a dividend yield of 12.01%. For 2024, the expected dividend payout ratio is approximately 86%, indicating a stable return on investment for shareholders based on the projected distributable cash.
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