This article is excerpted from Tom Yeung’s Moonshot Investor newsletter. To be sure not to miss anything of Tom’s 100x potential picks, subscribe to his mailing list here.
Inflation scares investors
Last week I visited family friends for their granddaughter’s christening.
The conversation eventually turned to investing.
“What inflation-proof investment can I give my granddaughter?” ” we asked.
“Real Estate,” I blurted out. Then, realizing that they were probably not looking to buy a house for their 6 month old yet, I immediately followed…
“…or Series I Savings Bonds!” »
The couple would settle for the latter, and I’d go with this: No matter their age or wealth, Americans fear inflation again.
The concern is perfectly understandable. Five years of 7% inflation turns $100,000 into the equivalent of $71,300. Ten years of the same will reduce it to $50,800. It’s no surprise that investment experts are starting to call cash “a melting ice cube.”
Worse still, alternative places to park your money are also becoming increasingly difficult to find.
The tech-heavy Nasdaq Compound the index is down 20% this year. Long-term corporate bonds and blue-chip stocks like JP Morgan (NYSE:JPM) and Home deposit (NYSE:HD) are too much.
But if you’re also worried about inflation, I have good news. And that doesn’t involve Series I bonds or watching ice cubes melt.
That’s because today’s Moonshot newsletter covers a company that pays out a 15% dividend yield – and growing by 45% per year.
Impossible, you say?
Not in the world of Moonshot.
The Little Cannabis REIT that could
In 2017, Fifth Street founder Leonard Tannenbaum sold his $6 billion fund to Oaktree Capital Management.
“I am more confident than ever that the time is right to take this step,” Mr. Tannenbaum said. “Oaktree’s expertise and long-term investment approach should deliver increased returns to BDC shareholders in the future.
Turns out Mr. Tannenbaum had his own plans. Within three years, the financier had launched a new business with a simple premise:
What if you could bring Wall Street capital to the cannabis industry?
The business of making money
The Wall Street financier had created a compelling business case. Federal laws prohibit national banks from working with legal cannabis companies, leaving a hole the size of Wells Fargo in the industry. Any marijuana startup had to navigate a patchwork of local credit unions or use sale-leaseback programs to secure seed funding.
Gamma CAF (NASDAQ:AFCG) changes that.
By establishing itself as a special purpose REIT, AFCG circumvented banking laws to become the first “legally listed cannabis lender” on a US stock exchange. In practice, it now resembles a business development corporation (BDC) that provides loans at a 12% interest rate in cash. The balloon payments end up turning those loans into a 19% total return.
This has created a win-win situation for investors and marijuana companies, despite the seemingly high rates. In a fast-growing market like cannabis, it’s often worth taking out expensive funding to dominate an untapped market. Venture capitalists have long used the same first mover advantage strategy to propel tech companies to dominance.
In a sense, Mr. Tannenbaum was the perfect person to lead this high-growth company. He had already made Fifth Street a major direct lender. And its trading prowess meant AFC Gamma already had $560 million in its pipeline by the time it filed its IPO paperwork.
The team also enjoys a first-mover advantage. The company rejected 362 of the 377 deals it explored, and its loan portfolio includes a well-diversified mix of long- and short-term contracts. To date, AFCG has not suffered any significant losses on its loans.
High growth and deep value
But for Moonshot investors, one metric stands out above all others:
AFC Gamma is incredibly inexpensive for a business growing at 45% per year.
The cannabis lender is now trading for just 0.9x the price per book, a ratio more commonly seen among REITs in zero-growth industries. By comparison, REITs in higher growth sectors like data center lender Digital Real Estate Trust (NYSE:DLR) are trading at 2.8x the book price or more.
Once you consider AFC’s growth potential, the picture becomes more absurd.
AFC Gamma’s high growth rate means it will likely earn around $70 million in funds from operations (FFO) this year, giving the company a 2022 P/FFO multiple of 4.4x and a multiple P/FFO 2023 of 2.5x.
Most REITs trade between 16x and 20x.
Finally, AFC Gamma is a surprisingly low-risk bet. The company has negative net debt of $12 million, making it one of the least leveraged REITs. Even if half of the company’s loans drop to zero, AFCG could still technically survive.
The risks of AFCG
However, an investment in AFCG involves several risks.
First, marijuana regulations may change. The SAFE Banking Act could open up the cannabis sector to traditional lenders, reducing AFCG’s dizzying returns. And although the CEO of AFC Gamma claims that the SAFE law would also benefit the AFCG with reduced debt costs, the additional competition would still be a net loss.
Second, Mr. Tannenbaum has a checkered history with fees. In 2018, the SEC sent a cease-and-desist order to Fifth Street, alleging the company improperly allocated expenses to its former BDC clients. Under a settlement, Fifth Street neither admitted nor denied the allegations; Oaktree would nevertheless terminate the subsidiary. AFC Gamma’s fees remain relatively high, even for the REIT sector.
Finally, there is a negative dynamic. Equities are down almost 30% since the start of the year as flattening yield curves have weighed on financial companies.
Nonetheless, Mr. Tannenbaum appears to have learned from many of his past mistakes. AFCG is exceptionally well capitalized and its generous dividend structure indicates better financial responsibility this time around.
Valuation matters too. Investors buying at 0.9x book value enjoy strong downside protection, especially given AFCG’s high-quality loan portfolio. The company could end today and still leave holders with a slight edge.
Markets don’t give us Moonshot bets like this very often. And when they do, it’s wise to take a closer look.
What about bitcoin?
Moonshot investors often turn to Bitcoin (BTC-USD) as a “safe haven” bet.
Tuesday, the wealth management company Loyalty investments join the choir. Investors can deposit up to 20% of their 401(k) accounts in crypto starting this summer.
“We clearly have different views than the Department of Labor with respect to the guidance they have issued,” said David Gray, head of workplace retirement products and platforms at Fidelity. “We think they should withdraw those guidelines.”
I can already hear young investors cheering. Around 60% of millennials already own a cryptocurrency, according to the annual Financial Literacy Study published by Investopedia. Holding these digital assets in a tax-advantaged account will amplify the gains.
But Fidelity may have already missed the mark. Another 10x return would make Bitcoin worth five times more than all US dollars. A 100x return would value Bitcoin more than the entire US stock market.
Fidelity will undoubtedly make money by bringing Bitcoin trading to more customers. But for ordinary investors, it’s not as simple as a win.
PS Do you want to know more about cryptocurrencies? Penny shares? Choice ? Drop me a note at [email protected] or connect with me on LinkedIn and let me know what you’d like to see.
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As of the date of publication, Tom Yeung had (neither directly nor indirectly) any position in the securities mentioned in this article.
Tom Yeung, CFA, is a Registered Investment Advisor on a mission to simplify the world of investing.