Q4 2023 Chicago Atlantic Real Estate Finance Inc Earnings Call
Unknown Executive: not limited to distributable earnings and adjusted distributable earnings, definitions of these non-gap measures, and reconciliations to the most comparable gap measures are included in our filings with SUC. Now, I'll turn the call over to John Mazarakis. Please go ahead.
Bernie 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.
John Mazarakis: Thanks, Tripp. Good morning, everyone. To allow time for more robust discussions in the Q&A, we plan on keeping our prepared comments shorter than usual today. This was a good quarter for us, and it wrapped up an exceptional year. We grew our portfolio in a measured fashion while improving credit quality, increasing our weighted average portfolio yield, and delivering a sector-leading total return of approximately 22.3%, all while keeping leverage well below the sector average. We're incrementally positive with our outlook on the industry and our operators as they benefit from the improving sentiment and strong demand. I think we're all aware of what's going on at the federal level with HHS's recommendation on cannabis rescheduling.
Thanks Tripp good morning, everyone to allow time for more robust discussions in the Q&A, we plan on keeping our prepared comments shorter than usual today.
This was a good quarter for us that wrapped up an exceptional year, we grew our portfolio in a measured fashion, while improving credit quality, increasing our weighted average portfolio yield and delivering a sector, leading total return of approximately 22, 3%, all while keeping leverage well below sector averages.
We're incrementally positive with our outlook on the industry and our operators they benefit from the improving sentiment and strong demand I think we're all aware of what's going on at the federal level with HHS his recommendation on candidates rescheduling.
John Mazarakis: We're equally focused on the positive credit quality impact that would result from the elimination of 280E associated with that rescheduling. The elimination of this tax burden will be a huge win for the industry as a whole, leading to significantly improved cash flow generation among our borrowers. At the state level, we're excited about the forthcoming rollout of adult-use sales in Ohio, expected in 2024, and other potential voter referendum changes in Florida, and recreational sales in Pennsylvania in the medium term.
Equally focused on the positive credit quality impacts that would result from the elimination of 280 <unk> associated without rescheduling. The elimination of this tax burden will be a huge win for the industry as a whole leading to significantly improved cash flow generation among our borrowers.
At the state level, we're excited about the forthcoming rollout of the adult use sales in Ohio expected in 2024, and other potential voter referendum changes in Florida and recreational sales in Pennsylvania in the medium term.
John Mazarakis: We're well positioned in these states and continue to leverage Chicago Atlantic's platform and relationships to be at the forefront of capitalizing on the evolving state legislative landscape. The demand for credit in this capital-constrained industry should only accelerate as a result. The maturity wall we have previously discussed is also beginning to materialize. Our pipeline of actionable deals across the platform has increased from 400 million in mid-2023 to approximately 600 million today. As the leading and most consistent platform committed to the cannabis industry, Chicago Atlantic remains positioned to be the first call for borrowers and financial institutions alike who want to deploy capital in the space. Providing our investors with attractive returns and protecting principle drives every decision we make at Chicago Atlantic. With improving sentiment in the space and better access to capital to fund growth in the portfolio, we hope for another good year. I will now turn it over to Peter. Thank you, John. Good morning.
We are well positioned in these states and continue to lever in Chicago, Atlantic's platform and relationships to be at the forefront of capitalizing on the evolving state legislative landscape.
The demand for credit in this capital constrained industry should only accelerate as a result.
Charity Wall. We have previously discussed is also beginning to materialize our pipeline of actionable deals across the platform has increased from $400 million in mid 2023 to approximately 600 million to date as the leading and most consistent platform committed to the cannabis industry Chicago Atlantic remains positioned to be the first.
Call for borrowers and financial institutions alike, who want to deploy capital in this space <unk>.
Providing our investors with attractive returns and protecting principal drives every decision we make at Chicago Atlantic with improving sentiment in the space and better access to capital to fund growth in the portfolio. We hope for another good year I will now turn it over to Peter.
Thank you John good morning.
Peter S. Sack: On December 31st, our loan portfolio had total loan commitments of $379 million across 27 portfolio companies with a weighted average yield to maturity of 19.4% compared with 19.3% on September 30th. Additionally, our weighted average loan to enterprise value was 44.1% compared with 42.5% on September 30th. We had another strong quarter of originations with $25 million of principal funding, of which approximately $9 million and $16 million was funded to new borrowers and existing borrowers, respectively. Our gross originations total was partially offset by $14 million of principal repayments, $11 million of which was related to unscheduled early repayments.
On December 31, our loan portfolio had total loan commitments of $379 million across 27 portfolio companies with a weighted average yield to maturity of 19, 4% compared with 19, 3% on September 30th.
The weighted average loan to enterprise value was 44, 1% compared with 42, 5% on September 30.
We had another strong quarter of originations with $25 million of principal fundings of which approximately $9 million and $16 million was funded to new borrowers in existing borrowers respectively.
Our gross originations total was partially offset by $14 million of principal repayments.
$11 million of which was related to unscheduled early repayments.
Peter S. Sack: Our portfolio is 81% floating rate based off the prime rate, which is consistent with last quarter. We have only six fixed rate loans in the portfolio with a weighted average yield on these fixed rate loans of 16%. The balance sheet remains well positioned with low leverage of 24% of book equity at year-end compared with 22% a year ago. Our guest service coverage ratio on a consolidated basis for the year was approximately 8-1 compared with a requirement of 1.35%.
Our portfolio is 81% floating rate based off the prime rate, which is consistent with last quarter, we have only 6% fixed rate loans in the portfolio with a weighted average yield on the fixed rate loans of 16%.
The balance sheet remains well positioned with low leverage of 24% of book equity at yearend compared with 22% a year ago.
Our debt service coverage ratio on a consolidated basis for the year was approximately eight to one compared with the requirement of $1 35 to one.
We continue to lead the industry in developing relationships with banking institutions seeking exposure to the sector.
Last month, we amended our credit facility to extend the maturity from December 2024 to June 2026, and we amended the accordion feature to permit the facility to grow from $125 million to up to $150 million.
Peter S. Sack: We continue to lead the industry in developing relationships with banking institutions seeking exposure to the sector. Last month, we amended our credit facility to extend the maturity from December 2024 to June 2026, and we amended the accordion feature to permit the facility to grow from $125 million to up to $150 million. As of December 31, we had $66 million outstanding on the revolving credit facility, and we've subsequently drawn down another $28 million. That leaves us with a total of approximately $10 million in operational liquidity, net of estimated liabilities. With an ultimate goal of approaching leverage equal to 100% to 200% of book equity, we remain under-leveraged.
As of December 31, we had $66 million outstanding on the revolving credit facility and we subsequently drawn down another $28 million.
That leaves us with a total of approximately $10 million in operational liquidity net of estimated liabilities.
With an ultimate goal of a protein leverage equal to 100% to 200% of book equity we remain under Levered with.
We stated a short term goal of getting to 50% of book equity, which would equate to significant portfolio growth and keep us well under the leverage held by many other mortgage Reits.
We continue to actively pursue expansion of our banking syndicate. This year to continue to increase the size of the line and fund additional growth in the portfolio.
I'll now turn it over to Phil.
Thanks, Peter net interest income for the fourth quarter increased 8% sequentially to $14 8 million gross interest income increased as a result of $1 8 million in prepayment fees earned on the $11 million of repayments as compared to $1 3 million of such fees earned during the third quarter.
Additionally, we deployed approximately $25 million in new loan principal at a weighted average yield to maturity of 18, 6% for.
For the year net interest income increased 22% the increase was driven by the 100 basis point increase in the prime rate throughout 2023 impacting approximately 80% of our portfolio that there is a variable rate as well as the impact of new deployments, resulting from the year over year portfolio growth.
Phil: We've stated a short-term goal of getting to 50% of book equity, which would equate to significant portfolio growth and keep us well under the leverage held by many other mortgage REITs. We continue to actively pursue expansion of our banking syndicate this year to continue to increase the size of the line and fund additional growth in the portfolio. I'll now turn it over to Phil. Thanks, Peter.
Additionally, total prepayment fees recognized interest income were $3 $5 million during 2023 compared to $1 $2 million during 2022.
Total operating expenses before the provision for credit losses increased to approximately $1 9 million from the third quarter, primarily from the increase in incentive fees of $1 6 million as well as $3 million of incremental general administrative and professional fee expenses.
Phil: Net interest income for the fourth quarter increased 8% sequentially to $14.8 million. Gross interest income increased as a result of $1.8 million in prepayment fees earned on the $11 million of repayments as compared to $1.3 million of such fees earned during the third quarter. Additionally, we deployed approximately $25 million in new loan principal at a weighted average yield to maturity of 18.6%. For the year, net interest income increased 22%.
I'd like to highlight that the larger quarterly incentive fee paid in Q4 2023 will contribute in a similar way to the rolling 12 months incentive fee calculation throughout fiscal year 2024.
For fiscal year 2023, total operating expenses before the provision for credit losses, and stock based compensation increased $4 million, primarily due to the $2 $2 million increase in net management and incentive fees aligned with the increase in distributable earnings year over year and an increase in general administrative expenses professor.
<unk> fees remained consistent at approximately $2 2 million.
<unk> reserve as of December 31, 2023 is approximately $5 million compared with $5 2 million and $3 9 million as of September 32023, and December 31 2022, respectively.
Phil: The increase was driven by a 100 basis point increase in the prime rate throughout 2023, impacting approximately 80% of our portfolio that bears a variable rate, as well as the impact of new deployments resulting from the year over year portfolio growth. Additionally, total prepayment fees recognized to interest income were $3.5 million during 2023 compared to $1.2 million during 2022. Total operating expenses before the provision for credit losses increased to approximately $1.9 million from the third quarter, primarily due to an increase in incentive fees of $1.6 million, as well as $0.3 million of incremental general administrative and professional fees.
The reserve determination for the quarter considered reversals attributable to the principal repayments received during the fourth quarter, which included the full repayment of prior loan numbers, 10% and 22 and was offset by new reserves on fourth quarter originations.
Quality of the portfolio remains stable with 88% of the portfolio risk rated three or better as of December 31, and September 30.
On a relative size basis, our reserve for credit losses represents one 4% of outstanding principal as of December 31.
Approximately 70% of the portfolio based on outstanding principal is fully secured by real estate collateral, 27% is partially secured with the remaining 3% having no real estate collateral our portfolio on a weighted average basis had real estate collateral coverage of one five times.
Adjusted distributable earnings per weighted average diluted share was <unk> 53 for Q4 and $2 26 for the year ended December 31, 2023, representing a year over year increase of seven 6%.
In January we distributed our Q4 regular dividend of <unk> 47 per share plus a special dividend of 29 per share totaled.
Phil: I'd like to highlight that the larger quarterly incentive fee paid in Q4 2023 will contribute in a similar way to the rolling 12-month incentive fee calculation throughout fiscal year 2024. For fiscal year 2023, total operating expenses before the provision for credit losses and stock-based compensation increased $4 million, primarily due to the $2.2 million increase in net management and incentive fees, aligned with the increase in distributable earnings year over year, and an increase in general administrative. Professional fees remain consistent at approximately $2.2 million. Our CECL reserve as of December 31st, 2023, is approximately 5 million compared with 5.2 million and 3.9 million as of September 30th, 2023 and December 31st, 2022, respectively. The reserve determination for the quarter considered reversals attributable to the principal repayments received during the fourth quarter, which included the full repayment of prior loan numbers 10 and 22, and was offset by new reserves on fourth quarter originations. Credit quality of the portfolio remains stable, with 88% of the portfolio risk rated three or better as of December 31 and September 30. On a relative size basis, our reserve for credit losses represents 1.4% of outstanding principal as of December 31st. Approximately 70% of the portfolio, based on outstanding principal, is fully secured by real estate collateral.
Total dividend distributions in 2023 amounted to $2 17 per share, which is approximately 94, 3% of adjusted distributable earnings per weighted average share.
Our book value as of December 31 was $14 94 per common share compared with $15 17 as of September 30th.
The sequential decline in book value is primarily attributable to the $29 per share special dividend declared in Q4.
Lastly, I'd like to highlight the guidance we shared for 2024 similar to last year, we are expecting to maintain a dividend payout ratio based on distributable earnings per share of 90% to 100% for the full year. If our taxable income requires additional distributions in excess of the regular quarterly dividend to meet our taxable income requirement we will.
We expect to meet that requirement with a special dividend in Q4 2024.
Operator, we're now ready to take questions.
Ladies and gentlemen to ask a question you will need to press star one on your telephone and wait for your name to be announced.
Please standby, while we compile the Q&A roster.
And again to ask a question. Please press star one.
Yeah.
One moment and final question.
Okay.
Right.
And I'm showing we have a question from Pablo Sonic Thompson and Associates. Your line is open.
Yeah.
Yes, good morning, everyone.
Look I mean, the first question relates to a transaction that was announced within your parent company.
Spike.
I'm, just trying to understand whether I understand that's a separate portfolio cannabis long related portfolio totally different from your company, but did you have a right to first refusal or did you have an opportunity to look at those loans, whether you wanted to buy them before the transaction was announced if you can comment on that please thank you.
Pablo this is an unrelated transaction to the REIT.
So we will just keep it at that thank you for your question.
Okay. If I can ask a follow up then.
In terms of obviously.
You have to deploy more capital now in the first quarter you've made.
Phil: 27% is partially secured with the remaining 3% having no real estate. Our portfolio, on a weighted average basis, had real estate collateral coverage of 1.5. Adjusted distributable earnings per weighted average diluted share was $0.53 for Q4 and $2.26 for the year ended December 31, 2023, representing a year over year increase of 7.6%. In January, we distributed a Q4 regular dividend of $0.47 per share, plus a special Total dividend distributions in 2023 amounted to $2.17 per share, which is approximately 94.3% of adjusted distributable earnings per weighted average share. Our book value as of December 31 was $14.94 per common share compared with $15.17 as of September 30. The sequential decline in book value is primarily attributable to the $0.29 per share special dividend declared in Q4.
I'll use of that facility, so that speaks well about about the outlook the growth outlook.
But when we look at that.
The refinancing from from my room, as we need them I'm just trying to understand from your point of view a size of the demand side of things right. Yes. The outlook is improving companies kept broadly expansion classroom, Pennsylvania, and Ohio. So the demand for your product is stronger but are you facing more competition in terms of our debt capital.
They are from their banks, such as <unk> or <unk>.
Since buying because others have mentioned thank you.
We actually consider this an isolated incident, we have not seen any signs of compression.
Our pipeline as we mentioned has increased significantly and we look forward to 2020 for a good year.
Okay.
One last question.
This morning ascend on their conference call. They talked about you know receiving or planning to receive tax refunds on <unk>, they're going to start providing a normal tax rate going forward.
Flying Tweedy under provisions for taxes.
Similar to what to leave Hassan so companies your potential financing general was taking what I would call it more proactive or more aggressive stance industrial providing for 280, <unk>, how does that color or impact. The way you evaluate these credits or do you have a totally agnostic to where they are doing thank you.
Phil: Lastly, I'd like to highlight the guidance we shared for 2024. Similar to last year, we are expecting to maintain a dividend payout ratio based on distributable earnings per share of 90% to 100% for the full year. If our taxable income requires additional distributions in excess of the regular quarterly dividend to meet our taxable income requirements, we would expect to meet that requirement with a special dividend in Q4 2024. Operator, we're now ready to take your call. Ladies and gentlemen, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. And again, to ask a question, please press star 1 1. One moment for a question. And I'm sure we have a question from Pablo Zunig from Zunig and Associates. We want to open it. Yes, good morning, everyone.
We're agnostic and we deferred to the accounting firms that service our clients.
We evaluate the process by which they.
Service, our clients and we are in a third party.
So overall that is a very positive development and we look forward to those cash flows increasing.
Thank you very much.
Thank you.
Okay.
Thank you.
Our next question and our next question coming from the line of Mark Smith with Lake Street. Your line is now open.
Hi, guys, just curious any thoughts very heavily on variable rate loans and he thought on.
Perhaps adding more fixed rate loans are kind of your feelings on the market today.
Mark after the announcement of the CPI today, I think we're pretty safe in floating rates.
So I don't expect rates to come down even with the adjusted.
Guidance from deferred so we will continue to operate in a floating rate environment with solid floors that has been our strategy and.
It has paid dividends so far.
Perfect and then the next question just kind of broadly would love more insight into kind of your outlook for the industry, what youre seeing out there as far as kind of pricing today and borrowing.
Unknown Executive: Look, I mean, the first question relates to a transaction that was announced within your parent company and Silver Spike. I'm just trying to understand whether, I understand that it's a separate portfolio, a cannabis loan-related portfolio, totally different from your company, but did you have a right to first refusal or did you have an opportunity to look at those loans and decide whether you wanted to buy them before the transaction was announced? If you can comment on that, please. Pablo, this is a non-related transaction to the REIT. So we will just keep it at that. Thank you for your question. Okay, if I can ask you a follow-up question then.
Barring no changes.
I guess your outlook, especially Barton no changes.
The store environment.
We're continuing to see leverage in the two X EBITDA level or below we won't look at anything above that.
Obviously, the equities have increased in value and that has trickled down into the private markets.
We are very pleased with what we see in the cannabis space.
We're also very happy that.
The recession has delayed and maybe you won't even you know everyone is talking about a soft landing now.
Unknown Executive: In terms of, obviously, you have deployed more capital now in the first quarter; you've made additional use of the facilities. So that speaks well about the outlook, the growth outlook. But, you know, when we look at that refinancing from Marimet with Bank Needham, I'm just trying to understand from your point of view, aside from the demand side of things, right? Yes, the outlook is improving. Companies probably have expansion plans in Pennsylvania and Ohio, so the demand for your product is stronger.
All of these are positive developments and we're sitting at all time highs across all of the indexes so that that's a.
It's a positive environment.
Excellent. Thank you.
Thank you.
Yeah.
Okay.
Thank you and again, if you would like to ask a question. Please press star one line.
And ladies and gentlemen, I see no further questions in the queue at this time and that does conclude our conference for today. We thank you for your participation.
Unknown Executive: But are you facing more competition in terms of debt capital out there from, you know, the banks, such as Bank Needham or Citizens Bank, as others have mentioned? Thank you. Well, we actually consider this an isolated incident.
You may now disconnect.
Yeah.
Okay.
Thank you.
Okay.
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Yeah.
Unknown Executive: We have not seen any signs of compression. Our pipeline, as we mentioned, has increased significantly. And we look forward to a good 2024. Okay, and if I can, one last question, you know, this morning on their conference call, they talked about, you know, receiving or planning to receive tax refunds on 280E. They want to start providing a normal tax rate going forward, not applying 280E to their provisions for taxes, very similar to what Trulieve has done. So companies, your potential clients, in general, are taking what I would call a more proactive or more aggressive stance in terms of providing for 280E. How does that color or impact the way you evaluate these credits, or are you totally agnostic to what they are doing? We're domestic, and we defer to the accounting firms that service our clients.
Okay.
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Unknown Executive: We evaluate the process by which they, you know, service our clients, and we are a third party. So overall, that is a very positive development, and we look forward to those cash flows increasing. Thank you very much. Thank you. One moment for our next question. And our next question comes from the line of Mark Smith with Lake Strait Yellow Nissopan.
Unknown Executive: Hi guys, just curious, any thoughts, you know, very heavily on variable rate loans? Any thoughts on, you know, perhaps adding more fixed rate loans or kind of your feelings on the market today? Mark, after the announcement of the CPI today, I think we're pretty safe with floating rates, so I don't expect rates to come down even with the adjusted guidance from the Fed. So we will continue to operate in a floating rate environment with solid floors. That has been our strategy, and it has paid dividends so far. And then the next question, just kind of broadly, you know, would love more insight into kind of your outlook for the industry, what you're seeing out there as far as kind of pricing today. And, you know, barring no changes in, you know, I guess your outlook, especially barring no changes in regulatory environments. We're continuing to see leverage at the 2x EBITDA level or below. We won't look at anything above that. Obviously, the equities have increased in value, and that has trickled down into the private market.
Okay.
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Unknown Executive: We are very pleased with what we see in the cannabis space. And, you know, we're also very happy that the recession has delayed. And maybe it won't even, you know; everyone's talking about a soft landing now.
<unk>.
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Unknown Executive: All these are positive developments. And, you know, we're sitting at all-time highs across all the indices. So that's a positive environment. Excellent, thank you. Thank you. University of Chicago.
Operator: Thank you for joining us. Thank you. Thank you. And again, if you would like to ask a question, please press star 11. And ladies and gentlemen, I see no further questions in the queue at this time, and that does conclude our conference for today. We thank you for your participation, and you may now disconnect.
Yes.
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Good day, and thank you for standing by.
Comed in Chicago.