Q2 2023 Chicago Atlantic Real Estate Finance Inc Earnings Call
Thank you for standing by and welcome to the Chicago Atlanta Real Estate Finance, Inc. Second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question.
During the session you will need to press star one on your telephone.
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Today's program is being recorded and now I'd like to introduce your host for today's program Tripp Sullivan and good morning, welcome to the Chicago Atlanta Real estate Finance Conference call to review the company's results for the second quarter of 2023.
On the call today will be Jon Mott's, Iraq is executive Chairman, Tony Campbell, Chief Executive Officer, Andreas Bode Myer co President and Chief Investment Officer, Peter Sac Co President, Phil Silverman interim Chief Financial Officer.
Our results were released this morning in our earnings press release, which can be found on Investor Relations section of our website along with our supplemental filed with the agency.
A live audio webcast of this call is being made available today for those who listen to the replay of this webcast. We remind you that the remarks made herein are as of today August eight 2023 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 laws, including statements related to the future performance of our portfolio.
Our pipeline of potential loans, and other investments future dividends and financing activities.
All forward looking statements represent Chicago Atlantic <unk> judgment as of the date of this conference call and are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations.
Investors are urged to carefully review various disclosures made by the company, including the risks 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.
Conciliations to the most comparable GAAP measures are included in our filings with the SEC.
I will turn the call over to John <unk>. Please go ahead.
Thanks, Trevor good morning, everyone.
After another quarter of volatility in the broader financial sector and candidates in particular, we can now add the fact that small cap equity risk premiums are at the lowest level in a couple of decades.
On slide yield will soon be king again.
If you add in worries about a recession or not that's a lot of ways to get distracted.
I wanted to address some of these topics distress, how we've approached the creation management and execution of our platform I guess Chicago Atlanta.
Over the past 25, plus years I've been through three recessions and several economic cycles.
Seen cycles, where there's catastrophic collapse or cycles, where competition is spears, our job as fund managers smooth out the peaks and troughs evident within the strategy that we're managing not beyond that that's better than the partnership was created with the state of New York that Peter will discuss in a moment.
With the largest platform our own originations team experienced in direct lending and well capitalize and conservative balance sheet and a diversified loan portfolio. I believe we can make a stronger case than ever before that we're the leading capital provider in this space.
The pipeline remains robust with actionable deals in excess of $400 million.
Sort of good things happening in states, such as Maryland in Missouri, and we're starting to see more transaction activity within the industry with a new states coming online that's leading to improved optimism among investors and different forms of capital allocation.
There's also a growing recognition.
High rate environment isn't going away quickly, which is leading to decisions about whether to grow or not to grow as well as increased M&A funded by debt financing.
We're in front of several trends in limited license states that are moving from medical to adult use in states that have seen the greatest price compression show improvements in wholesale pricing.
<unk> been cautious for some time now, but it could be time to change that to cautiously optimistic.
We're picking our spots and remain incredibly disciplined in the pursuit of new opportunities our partnership with New York is a great example of picking the right opportunity backed by strong credit and an appropriate return that could potentially lead to other partnerships.
I will now turn it over to Peter.
Thank you John .
On June 30th Governor <unk> announced a partnership with New York and the New York State cannabis social equity investment fund the.
Chicago Atlantic platform has committed $150 million to this partnership with the REIT accounting for up to $50 million of that total commitment.
Our investment is subject to the identification and due diligence a dispensary locations. We have a highly skilled real estate team that has led to our expertise to picking and building the right locations and they have been working on these sites for several months.
Last week, we advanced our first capital nearly $19 million to fund the opening of 17 dispensaries at least 15 of which should be operational in the fall.
This partnership with New York is a whole new ballgame and perhaps the largest commitment to social equity initiatives in the history of the industry.
We are fortunate to be the capital provider in the cannabis industry that has the operational financial legal and underwriting expertise not to mention the capital to come alongside the state of New York can make this happen.
If this works the way, we all envision there could be future opportunities to replicate this partnership and other states.
Tony why don't you take it from here.
Good morning.
At June 30, our loan portfolio had total loan commitments of $329 million across 25 portfolio companies with a weighted average yield to maturity of 19, 2% compared with 19, 4% at March 31, and 17, 7% a year ago.
As expected we kept newer rate originations limited with total gross originations of only $1 9 million to existing borrowers.
That was offset by $6 9 million of principal repayments 5 million of which was related to unscheduled early repayments.
Our portfolio remains 88% floating rate based off the prime rate consistent with last quarter and up from 60% from June of 2022.
With the federal reserve raising their target rate again last week and the increase in the prime rate to eight 5%. We continue to see a positive impact on portfolio yield I will now turn it over to Andreas.
For the first time in our life as a platform we experienced the default this quarter and moved low number nine to nonaccrual the decision to place this loan on non accrual as borrower specific and not representative of the performance across the rest of the portfolio.
The borrower did not make contractual payments due under our loan since made as a result, we accelerated the obligations due under the loan and are in the process of exercising our rights and remedies in pursuit of full repayment of outstanding obligations.
Due to our stringent underwriting we are confident that we will be made whole on this loan.
Current outstanding principal balance of approximately $16 1 million and no past due interest has been accrued or recognize the income.
On the capital structure side, we were able to increase our revolving credit facility to $100 million within the quarter with the addition of another bank to the syndicate with that upsizing. The revolver, we're comfortable where we are with that size as of quarter end, we had $43 million outstanding on the line.
With the advance on the $18 8 million, New York loans subsequent to quarter end that Peter mentioned earlier, we drew an additional $15 million on the revolver and have $58 million outstanding on the line as of today, which provides the company with a total of $46 million in liquidity.
Our balance sheet is still under Levered at 16% of book equity at quarter end compared with 22% at year end.
Debt service coverage ratio on a consolidated basis was 11, 5% to one as of quarter end compared with the requirement of 135 to one.
Given that leverage among other mortgage Reits remains elevated we believe we offer a very compelling dividend yield backed by strong portfolio yields and coverage without the level of risk that these other Reits have taken on in addition, we also benefit from strong underwriting and collateral coverage that extends well beyond the real estate I'll now turn it over to.
Phil to review our financial results.
Thank you Andreas net interest income for the quarter decreased $1 2 million or eight 4% from Q1.
In Q2, we recognized approximately <unk> 6 million in nonrecurring interest income from early principal repayments as compared to $1 million during the first quarter.
The decrease was further driven by the impact of one loan placed on nonaccrual status in may which accounted for $6 million of the sequential decline as well as a decrease in the average principal outstanding of $332 million during Q1 as compared to $319 million in Q2.
These decreases were partially offset by lower average borrowings on our revolving credit facility and the positive impact of the 25 basis point increase in the prime rate in May.
Total operating expenses for the quarter before our seasonal provision were down five 8% primarily due to the decrease in net management and incentive fees.
Adjusted distributable earnings was <unk> 55 per weighted average diluted share for Q2 compared with 62. During Q1, we distributed a dividend of <unk> 47, <unk> during the second quarter, which resulted in a dividend payout ratio of approximately 85%.
Year to date, we have distributed approximately 80% of taxable income.
The Q2 diluted earnings per weighted average common share was <unk> 47, compared to <unk> 60 in Q1.
The decrease is primarily primarily due to a higher provision for expected credit losses and stock based compensation, partially offset by the lower management and incentive fees.
We increased our quarterly seasonal reserve by $1 1 million as of June 30.
The seasonal determination for the quarter considered reserve reversals attributable to the principal repayments during Q2 as well as the downgrade of one loan with an outstanding principal balance of $11 million to a risk rating of four.
Our reserve estimate further contemplates benchmark third party loan loss data, which during Q2 reflected an increase in expected loss and probability of default rates as compared to Q1. The increasingly benchmark loss rates are the result of the continued rising rate environment and other macro environmental factors and contributed to the overall increase in the provision during Q.
Two on.
On a relative size basis, we increased the total reserve to approximately one 6% of outstanding principal as compared to one 3% as of March 31.
Approximately 74% of the portfolio based on outstanding principal is fully secured by real estate collateral, 24% is partially secured with the remaining 2% having no real estate collateral.
Our portfolio on a weighted average basis had real estate collateral coverage of one five times as of June 32023.
Our book value as of June 30th increased to $15 six per common share compared with $15 four as of March 31.
Lastly, I would note that based on our results for the first half of the year. We have affirmed our previously issued 2023 outlook operator, we're now ready to take questions.
Certainly and as a reminder, if you have a question at this time simply press star one on your telephone one moment for our first question.
And our first question comes from the line of Mark Smith from Lake Street. Your question. Please.
Hey, guys. Just curious if you could give us any additional details on this new York deal on potential.
Potential timing.
Additional capital put into this rates and any additional details from you guys would be great.
Good morning.
Unfortunately, we will stick to what we've published so far.
It's detailed enough to.
Two kind of provided guidance as to the risk return associated with the transaction.
In line with what we've done in the past, we can discuss our borrowers in detail.
That's fair.
Any additional thoughts on the new states I know we've.
Talk recently on Mems.
Thoughts on states, maybe have recently gone forward with the utilization or any that you see in the pipeline that maybe gets you.
Excited.
Ohio is probably the next state as you know they've gathered enough signatures to have the initiative on the ballot in November .
That was expected so we should be looking at Ohio, turning Reg sometime next year.
I would also say that we're a little bit cautiously optimistic with.
Although it's a harder way to get through the legislator.
Those two states are rather big and of course, the biggest state that has collected the signatures is the state of Florida, we're not holding our breath, but we have capable operators.
Representing our portfolio in Florida, and we also feel strongly that at some point in the next 24 months, probably Florida I will turn it back.
Okay I assume your outlook on anything changing at the federal level is probably unchanged.
Yes, that's that requires a crystal ball, we're not quite there yet.
But.
We can we can.
Speculate.
Yes.
The last question from me is just as we look at industry headwinds others in the industry that have reported pretty tough results and outlook here.
Are you seeing.
Any way to call out from pockets of.
Continued or maybe worsening weakness.
Geographically.
I haven't been seeing weakness in.
I'm kind of constantly boots on the ground what I have seen is a plateau as a result of turning off the capex.
Phosphate so I suspect as what we're seeing is prices are kind of leveling off and in some cases, taking upwards. So.
This is a darwinian process whoever knows what theyre doing theyre going to excel and theres going to be consolidation, which we were prepared for since day one.
Okay.
Thank you.
Thank you once again, if you have a question at this time, Please press star one one.
One moment for our next question.
Yeah.
And our next question comes from the line Mitchel Penn from Oppenheimer. Your question. Please.
Hi, guys, Hey, can you provide more details on the non accrual.
And give us an idea of the process and the timing.
In terms of how this is the first time, we've seen a non accrual so.
More color around that.
Mitch Chicago, Atlanta is known for being very efficient.
So I'm happy to report that we have a scheduled.
Sale, taking place tomorrow, but of course, the borrower has also filed a counterclaim and we're going to try to go over it today.
As of right now the sale is scheduled for tomorrow, and we have a few.
Buyers in line waiting too.
Oh.
Purchased the assets. So we're very we're very much ahead of the game.
Terrific.
And that.
16.
$2 million.
On your books.
I am sorry, Mitch can you repeat that.
The Val <unk>.
Carrying value of $16 2 million.
That loan loss plus 600.
That's correct Mitchell.
Carrying value on the balance sheet 16.2, we had about 600000 of income that would have been recognized on the slow and had it not been placed on non accrual status.
At this point, we're very comfortable that any reserves on the balance sheet are sufficient.
If there were to be any losses related to this loan.
Got it okay. Thanks, guys.
Everything we said.
Okay.
Yes.
Okay.
Okay.
Okay.
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