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Specialty finance company, Silver Spike Investment Corp. SSIC was formed to invest across the cannabis ecosystem through investments such as direct loans to and equity ownership of privately held marijuana companies.
An Analyst’s View
With an overweight rating and a 12-month price target of $15.30, Cantor Fitzgerald’s Pablo Zuanic said he sees >50% upside over the next 12 months on shares of SSIC, the only publicly listed cannabis-dedicated Business Development Companies (BDCs).
The Thesis
According to the report, Silver Spike Investment Corp.’s (SSIC) structure allows access to a larger addressable (debt) market opportunity relative to those focused only on real estate-backed lending.
“Although SSIC shares have remained stable in the last three months (~$10 range), mostly immune to the cannabis sector drop in Dec (MSOS ETF -40%), the stock trades at a 30% discount to NAV, compared with sectoral REIT-type comps trading either in line or at a premium (REIT IIPR [NC] +37%),” said Zuanic, who the company’s future should be able to scale up via debt leverage and eventually equity raises.
SSIC’s Business Strategy
The company, which estimates legal sales for 2022E at $33Bn and projects $72 billion in 2023, intends to focus on cash flow-based lending in addition to collateral-backed lending beyond just real estate.
“All this implies a much larger TAM (total addressable market) for a BDC vs. a REIT. Given the lending market in cannabis is highly fragmented at present with little competition from banks and other traditional lenders, the current demand/supply imbalance for debt capital should allow SSIC to capture attractive risk-adjusted returns,” noted Zuanic. “The SSIC portfolio at present (a mix of five private and public credits) yields 13-21% (gross weighted average yield of 15.7% as of mid-Nov) compared with 8.9% for the US high yield index, 8.3% for the direct lending yield index, and 6.5% for the US leveraged loan yield index.”
In mid-December, SSIC made five loans worth a combined ~$50 million. Given three of the five current credits are from MSOs (multi-state operators) with market caps above $250 million, including AYR Wellness Inc. AYR AYRWF, Curaleaf Holdings, Inc. CURA CURLF and Verano Holdings Corp. VRNO VRNOF, accounting for $26 million of investment value, “we would expect the remaining $40Mn in capital to be deployed to smaller private companies in loan sizes of $4-5Mn,” Zuanic concluded.
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