Chicago Atlantic Real Estate Finance, Inc. (REFI) stock intrinsic value fair value estimate & owner earnings analysis

Chicago Atlantic Real Estate Finance is a mortgage REIT that makes short-term senior secured loans to state-licensed cannabis operators and the owners of their property. At June 30, 2026 it held about $412 million of loan principal; at year-end 2025 the weighted average yield to maturity was 16.3% (range 9.7% to 26.9%). The book is concentrated in Florida, Illinois, Ohio and Pennsylvania. The yields are high because federal prohibition keeps most banks out of cannabis lending, a structural feature that is true today. The company is externally managed, and management and incentive fees (about $8.2 million in 2025) come out before shareholders see anything. How we measured earnings. On a strict cash basis the company earned about $1.46, $1.12 and $1.21 per share in 2023, 2024 and 2025. Reported earnings were higher ($1.88 per share in 2024, $1.68 in 2025) because part of the interest is paid in kind and added to the loan, or comes from origination discounts and interest reserves, and is only collected in cash when a loan repays. Because these loans are short and have repaid in cash on schedule, we value the business on its full interest earning power and then charge an explicit credit-loss cost in each case, rather than treating the deferred interest as either fully safe or worthless. Before credit losses that earning power was about $1.71 per share in 2025 and has run at about $1.55 per share annualized in the first half of 2026, as net interest income slipped to $26.0 million from $27.5 million a year earlier. Because borrowing is the raw material of a lender, interest on its debt is treated as an operating cost and no separate debt deduction is made. Each case ends at year ten with the loan book's equity returned to owners rather than assuming the earning power runs forever, since the manager's lending record is only a few years long. Book value was about $13.89 per diluted share at June 30, 2026. Credit is the central issue. Loans on non-accrual rose from $16.4 million at the end of 2024 to $48.9 million (about 12% of the book) at the end of 2025: Loan #9 ($29.0 million, now current on interest but kept on non-accrual), Loan #6 ($3.2 million, in default since May 2025) and cross-defaulted Loans #4 and #34 (unpaid interest since August 2025). In the first half of 2026 the company added $4.4 million to its loss reserve, taking it to $9.4 million, and net income fell to $12.3 million from $18.9 million. Borrowing also rose: the revolving line (prime-based, due June 30, 2028) went from $49.1 million at year-end to $91.1 million at June 30, 2026, alongside $50 million of 9% unsecured notes due October 18, 2028. The notes require at least $200 million of stockholders' equity (about $302 million at June 30, 2026) and cap total debt at $225 million. Base case ($17.40 per share): earning power of $1.50 per share before losses, slightly below the first-half 2026 run rate, less normal credit losses of 1% of the loan book a year (about $0.19 per share), gives $1.31 per share, held flat for ten years, then $13.89 of book value returned. On this basis 2025 earnings were roughly $1.52 per share after normal losses, so year one starts about 14% lower with no rebound assumed. No growth is credited: as a REIT it pays out nearly all income, so a larger book needs new shares or more debt, neither of which is in hand. The base assumes the existing reserve covers today's problem loans. Bear case ($13.55 per share): one full credit cycle of the kind this book has already shown. Half of the $48.9 million of non-accrual loans is lost (about $0.69 per share beyond the reserve), and a second wave of defaults the size of the 2025 wave (about 8% of the performing book, near $29 million) is lost at half its balance (another $0.67 per share). Those loans stop paying interest, ongoing losses run at 1.5% a year afterward, loan yields fall by 1.5 percentage points by year five as the December 2025 executive order directing marijuana's move to Schedule III draws more lenders in, and the $141 million of debt is refinanced in 2028 about 2 points more expensively. Earnings fall from $1.41 to about $0.63 per share by year five, and book value returned at year ten falls to $12.53. Equity stays above the $200 million covenant floor throughout. The case still values the shares above that reduced book because even at these loss rates the surviving loans earn well over 6%. A worse result would need several of the larger borrowers to fail together or losses on defaulted loans well beyond half their balance; the company has not recorded a principal charge-off to date, so there is no record of its actual recovery rates. Bull case ($19.98 per share): credit returns to its 2023-2024 pattern, Loan #9 returns to accrual and part of the 2026 reserve is released (a one-time lift of about $0.20 per share in year two). Earning power recovers toward $1.75 per share before minimal losses of about $0.10, and $13.89 of book value is returned at year ten. Compared with our previous review, all three values are lower. The first half of 2026 brought a larger reserve, lower net interest income and more borrowing, and the bear case now carries a full second default wave rather than only today's problem loans; the base and bull figures also now use book value per diluted share. Margin of safety. We are fairly confident in the earnings level because the interest is contractual and the loans are short, but not in credit: the defaulted loans are unresolved, and recoveries on cannabis collateral are untested because state licensing rules limit who can acquire it. The worst plausible outcome is several large borrowers failing together while federal reform pushes yields down; the business would survive that because it carries only about $141 million of debt against roughly $300 million of equity, but book value could fall well below $12.53. From $10.50, over a three-year holding period with the current $1.88 dividend and an exit at the base value, the base case implies about 31% a year; the bear case, with the dividend cut to about $1.00 and an exit at $13.55, implies about 18% a year; and if we are wrong on both credit and the dividend and the shares only reach the bear-case book of $12.53, about 15%. We accept those shortfalls only because the price sits well below even the stressed book value, so the loans themselves, which repay within about two years, cover that price. The margin-of-safety price is $10.50.