Analyst Predicts Success For Cannabis Finance Company Amidst Industry Struggles, Reiterates Overweight Rating

Silver Spike Investment Corp. SSIC is a specialty finance company formed to invest across the cannabis ecosystem through investments in the form of direct loans to cannabis companies.

The company allocated a total of $21 million to the Verano Holdings Corp. VRNOF $350 million senior secured credit facility in November and reported net investment income of $550,415 for the Q2 2023, compared to net investment loss of $128,186 in Q2 2022.

On January 18^th, cannabis REIT, Innovative Industrial Properties, Inc. IIPR, announced that three of its tenants are in default:

• SH Parent, Inc. (Parallel) was in default on its obligations to pay rent at one of IIP’s Pennsylvania properties (approximately 2.9% of invested / committed capital). Rent was paid in full through January 31, 2023 on all other IIPR properties leased by Parallel.

• Green Peak Industries, Inc. (Skymint) was in default on its obligations to pay rent at one of IIPR’s Michigan properties under construction (approximately 2.7% of invested / committed capital). Rent was paid in full through January 31, 2023 on all other IIPR properties leased by Skymint.

• Affiliates of Medical Investor Holdings, LLC (Vertical) were in default on their obligations to pay rent at IIPR’s California properties (approximately 0.7% of invested / committed capital).

IIPR share price fell from $110.78 to $91.9 (at the time of writing Friday morning), following the announcement.

The Analyst

As a reaction to IIPR’s announcement, Cantor Fizgerald's analyst Pablo Zuanic, maintained an ‘Overweight’ rating on Silver Spike Investment’s stock, with a 12-month price target of $15.30 (including a dividend).

The Thesis

The analyst maintained the price target for Silver Spike Investment, as the company structure allows access to a larger addressable (debt) market opportunity relative to those focused only on real estate-backed lending.

“Congress’ failure to pass the SAFE Banking Act, combined with macro challenges and state-specific issues, will pressure the U.S. cannabis industry, and especially those companies with stretched balance sheets," Zuanic said, adding that Silver Spike is BDC with a blue-chip credit portfolio and 40% of its capital still left to deploy, but trading at more than a 30% discount to net asset value.

At $9.55 (1/19), Silver Spike trades at more than a 30% discount to net asset value, and the enterprise valie is barely above zero.

Zuanic believes that increased deployment of the capital base, leveraged at some point, and the announcement of a recurring dividend payment will both help the stock return to net asset valuation.

"Also, we would expect investors (and future bank lenders to Silver Spike) to become more appreciative of the company’s loan portfolio as expected industry challenges start to hurt other companies," the analyst concluded.

The Price Action

Silver Spike Investment shares were trading flat at $9.51 per share at the time of writing Friday morning.

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