Q2 2022 Chicago Atlantic Real Estate Finance Inc Earnings Call
Good morning afternoon evening, and welcome to the Chicago, Atlanta Real estate Finance Conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
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I would now like to turn the conference over to Tripp Sullivan.
Please go ahead.
Thank you and good morning, welcome to the Chicago Atlanta Real estate conference call to review the company's results for the second quarter of 2022 on the call today will be John Mezz, Iraq. This executive Chairman, Tony Campbell, Chief Executive Officer, Andreas boat buyer.
Co President and Chief investment Officer, and Lindsay meant Chief Financial Officer, Eric.
Our results were released this morning in our earnings press release, which can be found on the Investor Relations section of our website along with our supplemental filed with the SEC.
A live audio webcast of this call is being made available today.
Those who listen to the replay of this webcast. It reminds you that the remarks made herein are as of today August nine 2022, it will not be updated subsequent to this call.
During this call certain comments and statements we make may be deemed forward looking statements within the meaning prescribed by the securities law, including statements related to the future performance of our portfolio our pipeline of potential loans with other investments.
Future dividends and financing activities.
All forward looking statements represent Chicago Atlantic judgment as of the date of this conference call and are subject to risks and uncertainties that can cause actual results to differ materially from our current expectations.
Investors are urged to carefully review various disclosures made by the company, including the risk and other information disclosed in the company's filings with the S E T.
We also will discuss certain non-GAAP measures, including but not limited to distributable earnings and adjusted distributable earnings definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures are included in our filings with the SEC I'll now turn the call over to John Macerich. Please go ahead.
Yeah.
Good morning, everyone and thank you for joining us.
We have a real tale of two cities today.
On the one hand, our fundamentals are strong in the states, where we're focused on within our portfolio on.
On the other hand, the states the state of the stock market and the capital markets in general is showing vulnerability.
We've invested a lot of time instilling the right perspective into the discussion around the growth potential of this industry, it's counter cyclical in nature and how it responds much like the pharmaceutical alcohol and tobacco industries.
They focus on limited license states and operators, who are vertically integrated is a far superior approach in our opinion to trying to pick winners and losers in crowded markets with significant price compression, destroying the margins are weaker operators.
While we've experienced to date backs up every fee says we've ever had about this industry and how well it can perform and so.
Tony will note in the moment, we are busier than ever across our platform new markets, such as New Jersey, New York, Ohio, and others are gradually adding new licenses and creating new demand our operators continued to be in good shape with lower leverage and no other debt on their capital structure, except ours, they have entrusted us with the <unk>.
Both of their business and Chicago Atlantic will be there with them for the long term.
Private market and industry participants understand the real value, we're creating in the public market everything in the sector appears to be trading at a fire sale.
I don't think it's our job to come all fears about the broader market that we can control, but it is our responsibility to make the right strategic decisions to ensure the long term growth of the REIT and the success of the platform we've established in Chicago Atlantic.
Until the broader capital markets can experience more stability and clarity we have ruled out the pursuit of any debt or equity offering to provide additional growth in the REIT portfolio. Our threshold has always been that any new growth had to be funded with accretive capital. It's obvious that is only available today.
Hey in the form of our credit facility. Therefore, we're redoubling our efforts to expand our existing facility through its existing accordion feature or pursue other growth options that are accretive to book value.
As noted in our earnings release, we have provided a range of estimates for our expected performance in the second half of the year. We're currently anticipating that Q3 and Q4 absent any additional increase in the facility would look a lot like Q2 with adjusted distributed distributable earnings in the range of the dollar to a dollar one five for the same.
And half of 2022 that would equate to $1 95 to $2 for the full year of 2022, we would also expect our dividends to be at least 47 cents per share for both quarters, which is too conservative might require a special dividend at the end of the year to true up our taxable income.
Given what the market is presenting we believe this is the right calibration to make for the week, we're very under Levered at only 17% of book value and our dividend is well covered we have a fortress balance sheet and generating strong returns for our shareholders. This is the right move to make for the REIT today.
Tony why don't you take it from here.
Thanks, John Good morning, everyone.
2022 has proven to be one of the more volatile years, and while both with macroeconomic issues, including inflation and rising interest rates and a lot of volatility within the cannabis industry.
More specifically on the cannabis market, we've seen some adjustments to reality on the pace of regulatory reform and price compression in many states primarily the largest western states.
All of these challenges or why it's important to have robust structuring on the front end as well as intangible loan monitoring during the ball relationship.
Cannabis lending is not high yield or liquid credit, where you buy and sell paper in your Ivory tower. It is direct lending that requires a significant amount of oversight.
Some examples of our approach include all after it leaves that income or all of the borrowers assets beyond the real estate stock pledges on all of their subsidiaries, particularly those that own the license and getting some form of personal guarantee on the majority of our borrowers.
On the monitoring side, we employ strict financial covenants that provide early warning that are designed to create tabling events long before you get any material deterioration in values.
And we require monthly reporting and covenant compliance and the vast majority of our borrowers. So we were able to maintain the most up to date information compared with others, who might wait 30 days after quarter end to get their data.
As lenders, it's our job to underwrite risk at.
One of the first in the space of any size I believe we've demonstrated we know how to do it and protect our capital.
The demand for capital remains extremely strong we intend to meet that demand through the Chicago, Atlanta platform and when capital markets become less volatile the REIT will be able to immediately increase its participation in the leading origination platform. We have created now Andreas will walk us through our investments and capital plan.
Thanks, Tony Good morning at June 30th our loan portfolio had grown to total loan commitments of 367 million across 22 portfolio companies. It has a weighted average yield to maturity of 17, 7% up from 17, 2% at March 31.
New originations during the quarter were 51 million comprised of 17 million to a new borrower and 34 million of incremental advances to existing borrowers during the quarter, we had one loan payoff at maturity.
All loans are current and performing our portfolio is currently 60% floating rate based off of the prime rate. So we have been able to effectively manage the impact of rising rates.
Reinforce what John said at the beginning of the call there isn't a demand problem in the cannabis space at this time, whether we're talking about consumers or the demand from borrowers for growth capital. The main issue from our perspective is the lack of available capital in this current environment to fund incremental growth on terms that would be accretive to book value we have net.
<unk> contemplated a dilutive capital raise whether debt or equity.
At accretive rates have always been our threshold.
And if our stock has been trading down in anticipation that we would either lock in fixed interest rates at these elevated levels with long dated maturities or issue equity at huge discounts to prices that have existed for most of this year. The only to grow the portfolio. Then hopefully today's comments are cleared that up I'll now turn it over to Lindsay to review our financials.
Thank you Andreas turning now to our financial results for the second quarter.
As expected we saw the full benefit of the deployment of our IPO proceeds and the use of the credit facility. In Q2 net interest income increased sequentially to $11 4 million from $9 8 million in Q1.
Total operating expenses for the quarter were $2 9 million, which includes management and incentive fees of 1.2 million G&A is 777000 and professional fees of 744000.
The incentive and management fees were up sequentially in line with the higher interest income while the other expenses were up as compared to prior quarter, primarily due to nonrecurring professional fees incurred during Q2.
G&A is still within our previous guidance of two $5 million to $3 million for the year.
Pursuant to ASC 326, we increased our provision for expected credit losses by $1 million in Q2 or six cents per weighted average diluted common share.
Companies Reserve has not increased it to any specific factors impacting the credit quality of our borrowers, but rather is primarily due to our quarterly reevaluation of overall current macroeconomic condition.
In determining this reserve we noted that 95% of the portfolio is fully secured by real estate and 5% have limited or no real estate collateral.
Our portfolio on average had real estate collateral coverage of one nine times as of June 32022.
As Tony mentioned earlier real estate is not our only collateral all of our loans are secured by equity pledge isn't the borrower and all athletes.
Well the seasonal reserve was added back in our calculation of distributable earnings consistent with previous quarters recall that we are not adding back the incentive fees to our calculation of distributable earnings and adjusted distributable earnings to provide a clear indication of our ability to pay dividends to shareholders.
After factoring in these items, our adjusted distributable earnings per share. It was 50 cents per diluted share for Q2 up sequentially from 45% in Q1.
Our book value as of June 30th was $15.13 per common share.
Operator, we're now ready to take questions.
Okay.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your headset before pressing the keys to withdraw your question.
Press Star then two.
Our first question comes from Aaron Hecht with JMP Securities. Please go ahead.
Hi, everyone. Thanks for taking my questions.
John you highlighted the capital market's volatility that's been going on out there are limited options are accretive.
Capital available to you guys that markets are.
Calmed down a little bit over the last couple of weeks.
Are you getting any closer to expanding that credit facility today, given what's gone on with the markets or is that relatively closed off and then secondly.
Are you considering any other potential financing options that are less traditional maybe preferreds or converts.
So I'm going to start from your second part of the question, we're not considering any other options and you converge are off limits, we looked at them.
Frankly, they don't make any sense and in terms of the revolving facility. A I think that's that's the best source of capital we can rely on.
It's very inexpensive relative to our rates and I think we're going to double down and go after the remaining 35 million and I believe within Q3 early Q4, we will.
We have another 35 million as part of that facility as the markets hopefully are coming down on the.
On the bad side of the market.
Gotcha.
And in terms of the near term liquidity until you get that $35 million.
I think you have a little over $25 million of commitments.
$26 million of liquidity.
Between your existing facility and in cash.
How do you manage that liquidity near term.
And how much do you need just to operate the business.
On a day to day basis.
So erinn I can take Oh go ahead John .
No no I was going to say Tony that that's that's yours go ahead, yes. So for that are and a lot of that in terms of some of the commitments are there. There are some discretionary items in there in the credit facility. So there are some items there, but for now and foreseeable future. The private fund has been taking all of the data.
A man that would be normally slated for the REIT and that has all been funded through put through the private fund.
Makes sense, okay. Thanks, I'll jump back in the queue.
Thanks Aaron.
Our next question comes from <unk> Mehta with E. F. Hutton. Please go ahead.
Yeah. Thanks, good morning.
You made some comments about our meeting demand through Chicago Atlantic platform and nothing you just talked about the private fund.
Can you maybe provide some color on on that side, you know the Chicago Atlantic platform and how you guys are meeting demand.
Yes, the private fund this was launched last year and has been raising money at a at a pretty fast pace ever since.
So just to give you. An example year to date, we funded about $120 million of deals.
Theres a fair amount of continued liquidity in that in that vehicle. So the deals that are normally slated for the rate the REIT rather.
Are the fully real estate conforming, they're being funded through this through.
Through the private fund, but normally in once everything settles down. These deals will go back to the REIT because they they have a preference when it comes to the fully conforming real estate deals.
Okay.
Second question on your credit line just to clarify did you guys say that you're looking to expand up to additional $35 million on the line.
Yes, the existing credit facility has an accordion feature going from 65 to 100 million subject to syndication and currently we're broadening our spectrum of options to bring other banks as co lenders and participants into the facility.
Okay. Thank you.
Our next question comes from Mark Smith with Lake Street. Please go ahead.
Hi, guys just looking for more of a broad update on the on the industry. You know what are you guys seeing a day to day in the states where you operate have you seen some continued market downturn is bleed over from some of these bigger states or you know do you feel like we're near a bottom you know any thoughts.
On the industry would be great.
Yeah.
Thank you for that question. This is John mass or I guess I I think the mean the meaningful compression that we see is primarily focused in the Western States, California, Colorado, Oregon, and Washington State, obviously for some of the medical States out East we have seen a little bit of a bottoms.
Alan.
They there has been a limited type of growth and in states like P. A a michigan surprised us I think Michigan is the really strong state cannabis is performing really well in that state and it has continuously grown and it's continuing to grow Massachusetts also has surprised us even though he has.
It's sort of.
Hybrid environment between a oligopoly and and they perfectly competitive market, depending on how you see it.
Massachusetts has been has been performing strongly of course, New York is coming online New Jersey has basically knocked it out of the park everyone knows that that state has performed extremely well.
Delaware was a surprise, we thought that Delaware was gonna turn wreck the Senate and the house voted for recreational sales the governor Unfortunately vetoed that that bill and even though they had a supermajority rights are they decided to join the governor in Delaware never turn back.
Other states that are coming on line, Ohio issued.
A few more licenses, where we're very excited about Ohio, we think it's going to perform really well long term P. A has a little bit of compression.
But it's a medical stayed with a with a ton of upside I think Florida is a is a huge success story, although I think from a medical perspective, it may be reaching.
Its peaks before recreational sales kick in.
That's kind of like a broad overview or the way I see the market I think the medical space, even if they're kind of reaching a plateau or still looking at an upside or maybe you know three to five bags from from a topline perspective, and maybe five to 10 X from a bottom line perspective once recreational.
Sales kick in so for the medical States. We're still very excited we've seen it time and time again in Illinois, and Massachusetts, Michigan whenever state moves from medical to wreck the topline and the Bottomline has like a serious multiple effect. So that's that's my perspective on it.
The overall.
State of the industry.
Perfect and then similar you hit on some certain states, but any thoughts or updates on as you guys look at regulatory environment kind of at the federal level.
I think there is a possibility that some sort of federal relief may actually.
Prizes this time, but I've gotten this question wrong. So many times so I don't even want to even tried to do answer. It are there is there is a lot of talk that something will happen, where we're not holding our breath, but if it will be beneficial overall I think it will lower our cost.
Capital He will bring more capital into the market I think we've built a phenomenal brand and we will be the beneficiaries of that growth.
Excellent. Thank you guys.
Thank you.
Again, if you have a question press Star then one our next question comes from have Harrison Vyvanse with Cowen.
Great [noise] excuse me.
Thanks, so much for taking my questions kind of wanted to double back on Mark's question, but maybe reframe it in terms of.
The portfolio, so there's been a little bit of a step up in the risk rating of your portfolio.
Understanding that might not reflect the fundamental performance of.
James I.
I guess my question is what geographies are you incrementally concerned about them and how is that driving your risk evaluation of the portfolio.
Yeah.
Lindsay you want to take that one.
Hi.
John and I think that that's a good point, noting that our risk ratings have increased across the portfolio.
This isn't related to any specific borrower or any particular issue related to a borrower.
But rather it is related to general market conditions with low interest rates and spreads I mean, I think John mentioned earlier, that's you know kind of a tale of two cities you know there've been two consecutive quarters of negative GDP growth. However, cannabis has grown 3% nationally in the first half of the year I mean, most of that coming from markets transitioning from medic.
Recreation.
So overall, we think the credit quality of our borrowers are strong in the states that we're in but we just don't want to ignore what's going on with the broader market with our portfolio.
Okay.
Truly just broad not not really specific market driven just to confirm.
That's correct, yes correct.
Okay understood and then I guess as we think about New York. It appears that the regulation is really arent going to favor them.
Stablish Msos, so I guess as you evaluate that as a potential opportunity.
What are your considerations in terms of the borrower profile and then and I guess.
Uh huh.
How big of an opportunity do you think that that status.
I think new York will be a huge success. It's a massive state everyone is talking about how that might be the biggest state. It may even surpass our California. We know that there is a meaningful sizable black market in New York that is operating.
Pretty much in the open and then to ask Joe to answer your question directly I think any any sort of fragmentation within the state is benefiting us as lenders it drives our.
Risk probably the risk remains the same because new York will be a great market, but the return is significantly higher than the middle market. So any type of a fragmentation is benefiting us is as credit providers.
Okay understood last one for me Tony you talked about the floating.
Rate portion of the portfolio being around 60% I guess, you know how is that tracking relative to internal <unk>.
Targets and as you as you execute new loans is obviously I imagine. The focuses is executing you know floating rate loans, but but how do you balance you know.
Your your execution between floating and fixed rate.
Yeah sure so pretty much everything that we've done for the last few months has been floating and everything that we plan to do in the future will be floating so if anything I think that's going to tick up.
As you know either new loans or are paid off or new loans are paid off and done so.
So I think that it just really one of those things that were much more resolute on on the front end. So I think that 60% is kind of a good benchmark, but our plan is to keep increasing that over a longer period of time.
Understood. Thanks, very much I'll jump back in the queue.
There are no further questions at this time. This concludes today's earnings call. Thank you for attending you may now disconnect.