Q1 2023 Chicago Atlantic Real Estate Finance Inc Earnings Call

Good day and thank you for standby welcome to the Chicago, Atlanta Real estate Finance incorporated first quarter 2023 earnings call.

At this time participants are in a listen only mode.

After the Speakers' presentation there'll be a Q&A session.

Ask a question during the session you will need to press star one one on your telephone you will hear an automated message.

To withdraw your question. Please press star one one again please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Tripp Sullivan. Please go ahead.

Thank you good morning, welcome to the Chicago, Atlanta Real estate Finance Conference call to review the company's results for the first quarter of 2023.

On the call today will be John Maths, Iraq is executive Chairman, Tony Campbell, Chief Executive Officer, Andreas both buyer co President and Chief Investment Officer, and Phil Silverman interim Chief Financial Officer.

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.

Not be updated subsequent to this call.

During this call certain comments and statements we make maybe deemed forward looking statements within the meaning prescribed by the securities laws.

<unk> statements related to the future performance of our portfolio.

Our pipeline of potential loans and other investments.

Dividends and financing activities.

All forward looking statements represent Chicago Atlantic judgment as of the date of this conference call and are subject to risk 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 SEC.

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.

Now I'll turn the call over to John <unk>. Please go ahead.

Thanks, Good morning, everyone.

With all that has transpired in the financial sector. These past months I believe we've proven out our original thesis from several years ago.

That thesis being we could bring a direct lending approach to help institutionalize the cannabis credit market and quickly become the leading capital provider in the space.

None of US would have anticipated the shake out we've seen of late with a large competitor pulling back from the space and other lenders reigning in their originations.

We've done what youre supposed to do in this type of environment.

Create the largest platform that attracted borrowers and lenders alike.

You need your own loans. So you know the collateral and the borrowers and have the direct relationship maintain access to accretive sources of capital.

Make sure your loan portfolio is predominantly floating rate in a rising rate environment.

Err on the side of being under Levered instead of over Levered if rates are rising in a recession is likely.

Diversify your borrowing base across geography and assets focus on the best credit operators in limited license states and structure the terms to protect your capital above all else.

Before I turn it over to Tony to provide more of the details I want to address our 2023 guidance.

We noted in our earnings release that we affirmed the outlook that we provided with our Q4 results, we reported better than anticipated distributable earnings this quarter due to make whole and prepayment fees from several principal repayments were received during the quarter.

As I noted on our last call, we're intentionally holding back on originations to be even more selective than we have been of late and to take advantage of a large number of refinancings among the largest msos over the next 12 plus months.

Tony why don't you take it from here.

Good morning.

At March 31, our loan portfolio had a total loan commitments of $328 million across 24 portfolio companies with a weighted average yield to maturity of 19, 4% compared with 19, 7% at December 31, and 17, 2% a year ago.

New originations during the quarter were $34 million with all about 800000 funded to new borrowers. We continue to be very disciplined in deploying the rights available capital to focus on strong credit operators and fulfill the growth capital needs of existing borrowers.

During the quarter, we received principal repayments totaling $58 3 million of which $57 8 million was related to unscheduled early.

Repayments and sales.

We received $1 million in prepayment fees and acceleration of original issue discounts from these repayments.

Using those proceeds we paid down the credit facility by $25 million.

We currently have approximately $53 million of liquidity and the reach that we can put to work in the coming months.

This credit facility remains the primary means for funding our portfolio growth and we are in active discussions with additional banks to potentially join the facility.

All loans are performing.

Portfolio is now 88% floating rate based off the prime rate, which is up from 83% floating rate from the last quarter and 63% from March of 2022.

The federal reserve raised their target rate again last week, which brought the prime rate to eight 5%.

We estimate that our weighted average portfolio yield that received 70% to 80% of the benefit from each increase in the prime rate.

Our.

She'd also continues to be under Levered at 14% of book equity at quarter end compared with 22% at year end.

Compared with other commercial mortgage reached with leverage ratios, averaging 200% to 300% our balance sheet is in great shape.

I think it's worth noting as well that our credit facility with simple debt service and real estate covenants is different from other mortgage Reits our credit facility is not a repo lines, where the collateral is mark to market on a much more frequent basis.

In our case, we have a debt service coverage ratio on a consolidated basis up seven six to one as of quarter end compared with the requirement of $1 35 to one.

We understand there is a concern that levered commercial mortgage Reits may lose credit availability due to rising interest rates, leading to a decline in real estate collateral value.

It's not applicable in our case based on how our credit facility is structured and the nature of our collateral.

Lastly, I'd like to address our pipeline.

We have an actionable pipeline of $600 million and opportunities.

We're taking advantage of this pipelines throughout the Chicago Atlanta platform, but we are doing some very selectively.

While we might be sacrificing a bit on loan portfolio growth in the near term. We believe the next 12 plus months could be one of the better periods in our industry to put capital to work.

I'll turn it over to Phil now to review our financial results.

Thank you Tony noninterest income for the quarter was up nearly 1% compared with Q4 due to the recognition of approximately $1 million of nonrecurring income from prepayment fees and acceleration of OID from principal repayments. We also benefited from the impact of the 50 basis point increase in the prime rate in March these positive impacts were.

Offset by the timing of those early principal repayments.

Total operating expenses for the quarter before Cecil provision were down 18%, primarily due to the decrease in net management and incentive fees aggregate G&A and professional fees increased sequentially by 220000.

Primarily attributable to expense reimbursements to our manager.

Distributable earnings were <unk> 62 per diluted share for Q1, compared with 57 in Q4, we.

We distributed a dividend of <unk> 47 for the first quarter, which resulted in a dividend payout ratio of approximately 76%.

Q1 diluted earnings per share was <unk> 60, compared with 41 in Q4 <unk>.

The increase was primarily due to a lower provision for expected credit losses, and lower net management and incentive fees.

We increased our quarterly seasonal reserve by 96000 as of March 31.

We sold the termination for the quarter considered reserve reversals attributable to the principal repayments received during the quarter.

On a relative size basis, we increased the total reserve to approximately one 3% of outstanding principal as of Q1 as compared to one 2% as of December 31.

Approximately 85% of the portfolio based on outstanding principal is fully secured by real estate with 15%, having limited or no real estate collateral our portfolio on a weighted average basis had real estate collateral coverage of one six times as of March 31 2023.

Our book value as of March 31 increased to $15 four per common share compared with $14.86 as of December 31.

Operator, we're now ready to take questions.

Thank you at this time, we will conduct a Q&A session. As a reminder to ask a question you need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

Our first question comes from Erin <unk> from JMP Securities Go ahead Erin.

Hey, guys. Thanks for taking my questions.

John .

How would you describe the business environment for your borrowers today, obviously, there's been pockets of challenges for the industry over the last.

Years, So I'm, just wondering is profitability getting incrementally better or worse in general.

And then I guess on that note. It sounds like Congress is trying to drum up support for.

And again any thoughts on if you think it will pass.

Good morning, everyone. Thanks.

Thanks for the question Erin.

I Couldnt agree with you meet with you more there are pockets out there.

I would say there isn't an incremental improvement, but what we've noticed is that there is a plateau.

I think prices are stabilizing.

Capex has been very scarce in the space.

And we expect them to start picking upwards I mean, some of the really competitive states out west that we don't.

We don't invest in have seen meaningful increases in wholesale price in the order of 30% in some cases.

So.

Nothing to write home about when you're when you're going from 700 to 900, it's not nothing great.

But still I think the fact that California.

Kind of seeing a major exodus from existing cultivators in Colorado, Oregon and Washington.

Practically start when it comes to capital I think I think it's going to.

Providing an environment for rising prices.

Out east, we've seen a plateau and we were expecting.

Prices begin to rise.

And I'm, excluding merit languages certainty obviously.

With respect to the Safe Act, we're not holding our breath.

But as we've said before.

For Chicago Atlantic, that's a positive event.

Because we have build a very large platform and we will be the beneficiaries of much needed leverage in this space.

Alright, I appreciate that.

I was looking at page nine of the supplement and it looks like 44% of your loans are allocated to construction projects.

And just wanted to get some color on.

How you underwrite construction versus.

Providing mortgages.

Assets that are already in place and do a lot of the borrowers that are doing construction loans.

Do they run at negative.

Corporate level cash flows.

For a period of time or or do you mandate that they need to have.

Corporate coverage before they can.

Start construction.

Thank you for the question. So we haven't really funded a construction loan in over 14 months.

And what we obviously have a construction department.

Led by our expert.

Michael I haven't yet.

Who is build millions of square feet.

Retail and industrial space.

In the Midwest.

We we currently don't have any any borrowers that have.

Purely construction projects other than expansions of existing operations and to answer your question directly we don't have any pre revenue loans and we haven't funded any loans for over 14 months.

Great. Thanks for taking my question.

Youre welcome.

Okay.

Our next question comes from Mark Smith from Lake Street, Mark. Please go ahead.

Hi, guys.

First question for me just wanted to clarify and make sure I understand things right. When you guys talk about kind of ramping and originations here.

And kind of your thought process on why it sounds like it's not as much kind of a risk profile that their capital preservation, but it's more so that you see some more opportunities coming out well up over the next 12 months in my thinking about that right or walk us through kind of why youre right that a little bit right now.

I didn't hear you clearly on the first part of the question.

I think yes. The second part we definitely are focused on the top 10, Msos and we think opportunities will be coming in the next two.

<unk> months or so.

With respect to the pipeline I think the pipeline is robust, but we won't Blink will kill alone. If we have to we're not in desperate need to deploy capital. So we've been extremely selective.

And we've killed a couple deals as they were maturing in the process.

But before funding so that's that's the update.

Okay.

And then any thoughts around shifting back to some fixed rate loans.

If the fed's done do you guys have any appetite for that today.

I think the best case.

Case scenario for us is to remain floating but actually increase are.

<unk>.

Our floor, our interest floors, all our loans have a have a floor. So we've been.

Increasing those floors.

Okay.

Perfect and I think the last one for me.

Any update on kind of your outlook on prepayments or anything that's coming up here over the next few months.

Hey, Thanks, Mark No I think with the prepayments that occurred in Q1, there was really no consistent theme.

Cross what was paid down paid off sold during the quarter and yes.

Steve we've discussed a little bit we havent seen a change in the availability of sources of capital institutional capital for operators with kind of the.

Yes.

No movement, imminently and safe, but.

With the early repayments being able to occur for a variety of reasons.

We don't have any guidance towards that for the remainder of the year.

Okay, maybe I'll sneak in one more just big picture thoughts here can you walk us through.

We were to see Safe Act passed.

How that would change your outlook and how you guys operate.

Business would you get more aggressive walk us through any changes that would make on your business.

Yes, we would probably be a little more aggressive I think we would be the beneficiaries of cheaper capital primarily coming from the debt side of the equation.

And being the largest tasting we that we will have access to those deals now the capital I think it will be cheaper, but I think also there.

Rates are going to be somewhat more in line with mainstream industries that kind of reflect the positioning of cannabis in the broader U S economy, so not not the cheapest, but still there will be likely candidates premium due to the fact that this would be still a taboo industry.

I think the net net benefit to investors will be somewhere along the lines of where it is today because of those two counteracting.

Sort of forces.

Okay.

Great. Thank you.

Okay.

I would now like to turn it back to John <unk> for closing remarks.

Thank you all for joining us. This morning, we're available for follow up questions. If anyone needs to ask any other questions. Thank you.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

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