These Cannabis-Sector Stocks Aren’t Typical Yield Plays: Why They’re Worth the Risk
The cannabis industry is often viewed through the lens of its playful products with unique names such as “Khalifa Kush” or “Zen Leaf.” However, beyond the whimsy, there’s a financially compelling aspect for yield-seeking investors: attractive dividends offered by cannabis-sector lenders. As traditional banks shy away due to strict regulatory compliance, specialized cannabis lenders find themselves in a favorable position within this expanding market.
Investment Opportunities in the Cannabis Lending Space
As of the end of 2024, companies like Chicago Atlantic Real Estate Finance (REFI) showcased impressive financial yields, recording a weighted average yield to maturity of 17.2% across its diverse portfolio of 30 loans. This advantage stems from the aforementioned limited access to funding that cannabis companies experience, leaving them reliant on specialized lenders. These lenders can focus on stable borrowers, securing their positions with desirable collateral, such as real estate and sales licenses.
Interestingly, while the cannabis industry faces concerns about an impending “wall of debt,” Chicago Atlantic’s CEO, Peter Sack, argues that fears are overblown. “Yes, some companies in the space will fail, but many have the strength to simply refinance,” he stated in a recent interview. This assertion is based on their preference to lend to companies operating in multiple states and limited-license jurisdictions, which reduces the risk of oversaturation in the market.
Market Trends and Resilience
Despite an overwhelmingly negative sentiment surrounding the cannabis sector, certain positive trends hint at underlying strength. For one, concerns related to tariffs imposed during the Trump administration are minimal, given the domestic nature of cannabis businesses. Conversely, industry analysts believe that during economic downturns, cannabis demand, much like alcohol and cigarettes, remains stable. For instance, Aaron Miles, chief investment officer at cannabis retailer Verano (VRNOF), reassures that loyal customers, especially medical cannabis users, are unlikely to decrease their spending during a recession.
Prices in the cannabis market are also showing signs of stabilization after years of decline. “Some markets are starting to reverse the trends that have soured commentary on the space,” Sack noted, emphasizing a gradual recovery in states like Florida, Illinois, and New Jersey. These stabilization efforts are not yet reflected in cannabis stock valuations, suggesting an overlooked normalization process.
Federal-Level Reform Potential
Looking ahead, regulatory reform at the federal level could considerably enhance the cannabis sector’s financial landscape. President Trump has previously campaigned to reclassify cannabis from Schedule I to Schedule III under the Controlled Substances Act, a move that could alleviate stringent IRS rules barring businesses from deducting operating expenses. Insights from industry insiders indicate that this remains a priority in the current administration, with hopes for the introduction of a cannabis banking-reform bill similar to previous iterations of the SAFER Banking Act.
Cannabis Lenders to Watch
Investors eyeing opportunities in the cannabis lending sector may want to consider three prominent companies:
- Chicago Atlantic Real Estate Finance (CAREF) – This company has a well-diversified loan portfolio worth $410 million across 30 borrowers with a projected pipeline of $460 million. The recent quarterly dividend was set at $0.34 per share with no bad debts reported.
- Chicago Atlantic BDC (LIEN) – Closely affiliated with Chicago Atlantic REFI, this company boasts 77% of its loans in the cannabis sector and a weighted average yield of 16.5%. Its diversified portfolio covers finance, insurance, retail, and more.
- Advanced Flower Capital (AFCG) – Operating a loan portfolio of $368.8 million, AFCG’s yield to maturity stands at about 18%. While they are actively working out some distressed loans, recent insider purchases signal confidence in their recovery strategies.
In conclusion, while investing in cannabis-sector loans may come with its handful of risks, the potential for high yields and stabilization in prices, alongside the prospect of federal reforms, make it an enticing option for yield-oriented investors. As the industry continues to evolve, keeping an eye on market conditions, company fundamentals, and regulatory changes will prove crucial for making informed investment decisions.