Q1 2024 Chicago Atlantic Real Estate Finance Inc Earnings Call
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Okay.
Good day, and thank you for standing by welcome.
Operator: Good day, and thank you for standing by. Welcome to the Chicago Atlantic real estate financing first quarter 2024 earnings call.
Welcome to the Chicago, Atlanta Real estate financing first quarter 'twenty 'twenty four earnings call.
Operator: At this time, all speakers and 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, you will need to press star 1-1 on your telephone. You'll then hear an automated message advising that your hand is raised. To withdraw your questions, please press star 11 again. Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your first speaker today, Tripp Sullivan from Investor Relations.
Operator: At this time all speaker all participants are in a listen only mode.
Harry M. Sullivan: After the speaker's presentation, there will be a question and answer session.
Harry M. Sullivan: To ask a question you will need to press star one one on your telephone.
Speaker Change: If youre an automated message I've seen that your hands is right.
Harry M. Sullivan: To withdraw your question. Please press star one again.
Harry M. Sullivan: Please be advised that today's conference is being recorded.
Operator: I would now like to hand, the conference over to your first speaker today, Tripp Sullivan with Investor Relations.
Harry M. Sullivan: to begin. Thank you. Good morning.
Harry M. Sullivan: You may begin.
Harry M. Sullivan: Welcome to the Chicago Atlantic Real Estate Finance Conference call to review the company's results. On the call today will be John Mazarakis, Executive Chairman; Peter Sack, Co-Chief Executive Officer; and Phil Silverman, Chief Financial Officer. Our results were released this morning in our earnings press release, which can be found in the Investor Relations section of our website, along with our supplemental files with the SEC. A live audio webcast of this call is being made available today.
Harry M. Sullivan: Good morning, welcome to the Chicago, Atlanta Real estate Finance conference call to review the company's results.
Harry M. Sullivan: On the call today will be John Mills, Iraq is executive Chairman, Peter Sac Co Chief Executive Officer, and Phil Silverman, Chief Financial Officer.
Harry M. Sullivan: Our results were released this morning in our earnings press release, which can be found on the Investor Relations section of our website.
Harry M. Sullivan: Along with our supplemental filed with the SEC.
Harry M. Sullivan: A live audio webcast of this call is being made available today.
Harry M. Sullivan: For those who listened to the replay of this webcast, we remind you that the remarks made herein are as of today and 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 and other investments, future dividends, and financing activities.
Harry M. Sullivan: For those who listen to the replay of this webcast. We remind you that the remarks made here and random today will not be updated subsequent to this call.
Harry M. Sullivan: During this call certain comments and statements we make may be deemed forward looking statements within the meaning prescribed by the securities laws.
Harry M. Sullivan: Including statements related to the future performance of our portfolio.
Harry M. Sullivan: Our pipeline of potential loans, and other investments future dividends and financing activities.
Harry M. Sullivan: All forward-looking statements represent Chicago Atlantic's 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. I'll now turn the call over to John Mazarakis. Please go ahead.
Harry M. Sullivan: All forward looking statements represent Chicago Atlanta ex 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.
Harry M. Sullivan: <unk> 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.
John Mazarakis: We also will discuss certain non-GAAP measures, including but not limited to distributable earnings and adjusted distributable earnings.
John Mazarakis: Definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures.
John Mazarakis: Included in our filings with the SEC I'll now turn the call over to John <unk>. Please go ahead.
John Mazarakis: Thanks, Tripp. Good morning, everyone.
John Mazarakis: Thanks. Good morning, everyone. We started 2024 much like we ended 2023 growing the loan portfolio in a disciplined fashion, maintaining strong credit quality and an attractive weighted average portfolio yield and diversifying across operators in states. The.
John Mazarakis: We started 2024 much like we ended 2023, growing the loan portfolio in a disciplined fashion, maintaining strong credit quality and an attractive weighted average portfolio yield, and diversifying across operators and states. The biggest news on the regulatory front was, of course, last week's announcement that the DEA has pledged to reschedule Canada. We were thrilled by this significant step in the process. Once enacted, the policy change is likely to bring significant benefits to the industry, including the elimination of 280E that we discussed last quarter, increased access to capital, and increased employment and investment.
John Mazarakis: The biggest news on the regulatory front was of course last week's announcement that the DEA has pledged to reschedule candidates.
John Mazarakis: We're thrilled by this significant step in the process once enacted the policy change is likely to bring significant benefits to the industry, including the elimination of $2 80 that we discussed last quarter increased access to capital and increased employment and investment.
John Mazarakis: The state-level news on legalization continues to remain positive as well, with the Florida Supreme Court recently approving ballot language to have a referendum in front of voters in November and Ohio likely to have the recreational rollout soon.
John Mazarakis: The state level news on legalization continues to remain positive as well with the Florida Supreme Court recently approving ballot language. They have a referendum in front of voters in November and Ohio are likely to have the recreational rollouts soon.
John Mazarakis: We're staying in front of these developments in both states as well as in PA. Our pipeline of actionable deals across the Chicago Atlantic platform currently stands at $585 million, with our focus remaining on operators in limited licensed states and those transitioning from medical to adult use. For the last two quarters, we've called out the improving sentiment in the cannabis industry. That has translated into loan demand, and it has helped in accessing additional capital to deploy.
John Mazarakis: Staying in front of these developments in both states as well as NPA.
John Mazarakis: Our pipeline of actionable deals across the Chicago Atlantic platform currently stands at 585 million with our focus remaining on operators in limited license states and those transitioning from medical to adult use.
John Mazarakis: For the last two quarters, we've called out the improving sentiment in the cannabis industry that has translated into loan demand and he is helping us accessing additional capital to deploy.
John Mazarakis: Peter will touch on our expansion of the credit facility, but I'd like to highlight our use of the ATM in an accretive fashion during the quarter. We issued approximately 896,000 shares through the ATM program at a weighted average price of $15.93, raising net proceeds of approximately $13.9 million. Most importantly, we sold those shares at a premium-to-book value. The same discipline we brought to underwriting new opportunities is the same one we've used to determine the best time and manner to access capital. Peter, why don't you take it from here?
Speaker Change: Peter will touch on our expansion of the credit facility, but I'd like to highlight our use of the ATM in an accretive fashion during the quarter. We issued approximately 896000 shares through the ATM program at a weighted average price of $50 93, raising net proceeds of approximately $13 9 million.
John Mazarakis: Importantly, we sold those shares at a premium to book value.
Peter: The same discipline, we brought to underwriting new opportunities is the same one we've used to determine the best time and manner to access capital.
John Mazarakis: Peter why don't you take it from here.
Peter S. Sack: Thank you, John. Good morning.
Peter: Thank you John good morning.
Peter S. Sack: At March 31st, our loan portfolio had total commitments of $401 million across 28 portfolio companies with a weighted average yield to maturity of 19.4%, which remained consistent with December 31st. Additionally, our weighted average loan to enterprise value was 40.5% compared with 44.1% at year end. We had another strong quarter of gross originations with $22.5 million of principal fundings, of which $6.7 million and $15.8 million were funded to new borrowers and existing borrowers, respectively.
Peter: At March 31, our loan portfolio had a total commitments of $401 million across 28 portfolio companies with a weighted average yield to maturity of 19, 4%, which remain consistent with December 31.
Peter S. Sack: Our weighted average loan to enterprise value was 45% compared with 44, 1% at year end.
Peter S. Sack: We had another strong quarter of gross originations with $22 5 million of principal fundings of which $6 7 million and $15 8 million was funded to new borrowers and existing borrowers respectively.
Peter S. Sack: We had no unscheduled principal repayments during the quarter. Our portfolio remains predominantly quoting-rate, with 77% of the portfolio based off of the prime rate. We continue to pursue floating rate loans with a floor set at the prevailing prime rate. We have seven sixth-rate loans in the portfolio, with a weighted average yield on these sixth-rate loans of 18.9%. The balance sheet retains low leverage at 28% of book equity compared with 24% at year end.
Peter S. Sack: We had no unscheduled principal repayments during the quarter.
Peter S. Sack: Our portfolio remains predominantly floating rate with 77% of the portfolio are based off the prime rate.
Peter S. Sack: We continue to pursue floating rate loans with floors at the prevailing prime rate.
Peter S. Sack: We have 7% fixed rate loans in the portfolio with a weighted average yield on the fixed rate loans of 18, 9%.
Peter S. Sack: The balance sheet pertains low leverage at 28% of book equity compared with 24% at year end.
Peter S. Sack: Our debt service coverage ratio on a consolidated basis for the quarter was approximately 5 to 1, compared with a requirement of 1.35 to 1. As noted on the Q4 call, we extended the maturity of our credit facility to June 2026 and increased the accordion up to $150 million. As of March 31st, we had $82.3 million outstanding on the revolving credit facility, and we've subsequently drawn down another $1.5 million. That leaves us with a total of approximately $22 million in operational liquidity, net of estimated liabilities. I'm going to turn it over to Phil.
Peter S. Sack: Our debt service coverage ratio on a consolidated basis for the quarter was approximately 521 compared with a requirement of $1 35 to one.
Phil: As noted on the Q4 call we extended the maturity of our credit facility to June 2026, and increased the accordion up to $150 million.
Phil: As of March 31, we had $82 3 million outstanding on the revolving credit facility and we subsequently gone down another one $5 million that leaves us a total of approximately $22 million in operational liquidity net of estimated liabilities.
Phillip Silverman: Thanks, Peter. Our net interest income for the first quarter declined sequentially from the fourth quarter of 2023 from 14.8 million to 13.2 million, or 10.8%. However, gross interest income from recurring cash interest, PIC interest, unused fees, and amortization of discounts increased by 0.2 million for the comparable period. The sequential decline results primarily from the lack of unscheduled principal payments during the quarter, which generated no prepayment fees, compared with 11 million of repayments during the fourth quarter of 2023, which generated 1.8 million of prepayment fees. Prepayments on our loans remain idiosyncratic, and the first quarter was representative of the portfolio's run rate performance. Additionally, interest expense increased by 413,000, or 24.5%, as a result of greater weighted average borrowing.
Peter S. Sack: I'll turn it over to Phil.
Phil: Thanks, Peter our net interest income for the first quarter declined sequentially from the fourth quarter of 2023 from $14 8 million to $13 2 million or 10, 8%. However, gross interest income from recurring cash interest pik interest unused fees and amortization of discounts increased by <unk> 2 million for the comparable.
Phillip Silverman: All periods.
Phillip Silverman: The sequential decline results, primarily from the lack of unscheduled principal payments during the quarter, which generated no prepayment fees compared with $11 million of repayments during the fourth quarter of 2023, which generated $1 8 million of prepayment fee income.
Phillip Silverman: Prepayments on our loans remain idiosyncratic in the first quarter was representative of the portfolios run rate performance.
Phillip Silverman: Interest expense increased by 413000 or 24, 5% as a result of greater at weighted average borrowings the company at $81 3 million outstanding on our credit facility as of March 31, compared with $66 million as of December 31, 2023.
Phillip Silverman: The company had $81.3 million outstanding on the credit facility as of March 31, compared with $66 million as of December 31, 2023. Total operating expenses before the provision for credit losses decreased approximately $1.6 million from Q4 2023, primarily resulting from the decrease in management and incentive fees of $1.5 million, while other administrative and professional fees remain consistent.
Phillip Silverman: Total operating expenses before the provision for credit losses decreased approximately $1 6 million from Q4, 2023, primarily resulting from the decrease in management and incentive fees of $1 5 million other.
Phillip Silverman: Other administrative and professional fees remain consistent.
Phillip Silverman: Our Cecil reserve as of March 31 was approximately 5.4 million compared with 5 million as of December 31, 2023, an increase of approximately 400,000. On a relative size basis, our reserve for expected credit losses represents 1.4% of outstanding principal at both March 31 and December 31, 2023. Credit quality of the portfolio also remains stable, with 78% and 77% of the portfolio risk rated three or better as of March 31st and December 31st. We downgraded the risk rating for one position from a two to a three during the quarter, while we closely monitor its performance. However, the loan continues to perform and meet its debt service obligation.
Phillip Silverman: Our seasonal reserve as of March 31 was approximately $5 4 million compared with $5 million as of December 31, 2023, an increase of approximately 400000.
Phillip Silverman: On a relative size basis, our reserve for expected credit losses represents one 4% of outstanding principal at both March 31, and December 31 2023.
Phillip Silverman: Credit quality of the portfolio also remained stable with 78% and 77% of the portfolio risk rated three or better as of March 31.
Phillip Silverman: At March 31, we.
Phillip Silverman: We downgraded the risk rating for one position from a $2 three during the quarter, while we closely monitor its performance. However, the loan continues to perform and meet its debt service obligations.
Phillip Silverman: Loan number 9 remains on non-accrual status and is included in risk rating 4 and carries a reserve for credit losses of approximately $1.3 million. Approximately 66% of the portfolio, based on outstanding principle, is fully secured by real estate collateral. 30% is partially secured, with the remaining 4% having no real estate collateral. Our portfolio, on a weighted average basis, had real estate coverage of 1.3 times as of March 31, compared with 1.5 times as of December 31, 2023. The real estate coverage ratio decline is partially driven by the funding of loan number 31, which is secured by collateral other than real estate.
Phillip Silverman: Hello number nine remains on non accrual status.
Phillip Silverman: It's included in risk rating four and carries a reserve for credit losses of approximately $1 3 million.
Phillip Silverman: Approximately 66% of the portfolio based on outstanding principal is fully secured by real estate collateral, 30% is partially secured with the remaining 4% having no real estate collateral.
Phillip Silverman: Our portfolio on a weighted average basis had real estate coverage of one three times as of March 31.
Phillip Silverman: Compared with one five times as of December 31, 2023.
Phillip Silverman: The real estate coverage ratio decline is partially driven by the funding of low number 31, which is secured by collateral other than real estate.
Phillip Silverman: Adjusted distributable earnings per weighted average diluted share was 52 cents for Q1 2024, compared with 53 cents for the fourth quarter ended December 31. In April, we distributed the first quarter regular dividend declared by our board of 47 cents per common share, which was consistent with the prior quarter and the first quarter of last year. Our book value as of March 31st was $14.97 per common share compared with $14.94 as of December 31st.
Phillip Silverman: Adjusted distributable earnings per weighted average diluted share was <unk> 52 for Q1 2024, compared with 53 for the fourth quarter ended December 31.
Phillip Silverman: In April we distributed the first quarter regular dividend declared by our board of <unk> 47 per common share, which was consistent with the prior quarter and the first quarter of last year.
Phillip Silverman: Our book value as of March 31 was $14 97.
Phillip Silverman: Per common share compared with $14 94 as of December 31.
Phillip Silverman: The sequential increase in book value is due to first quarter basic earnings per share in excess of the regular quarterly dividend of $0.47, an accretion from the issuance of common stock at a premium to book value. Lastly, we affirmed the guidance we issued in conjunction with our Q4 release. Operator, we're now ready to take questions. Thank you.
Phillip Silverman: The sequential increase in book value is due to first quarter basic earnings per share in excess of the regular quarterly dividend of <unk> 47.
Phillip Silverman: And accretion from the issuance of common stock at a premium to book value.
Phillip Silverman: Lastly, we affirmed our guidance we issued in conjunction with our Q4 release, operator, we're now ready to take questions.
Speaker Change: Thank you.
Operator: At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A list. Our first question today will come from Mark Smith on Lake Street. Your line is open.
Speaker Change: At this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.
Operator: Your question. Please press star one again please.
Operator: Please standby, while we compile the Q&A roster.
Operator: Our first question today will come from Mark Smith with Lake Street. Your line is open.
Mark Eric Smith: Hi guys, I just wanted to ask a kind of big picture question here as we think about, you know, DEA and rescheduling. Can you just give us more insight into kind of the short and long-term impacts primarily on your business, you know, more so than in kind of the broad cannabis industry, including kind of longer-term, you know, increased competition that could come in the landing space?
Mark Eric Smith: Hi, guys I, just wanted to ask a kind of big.
Mark Eric Smith: That's your question here is just to get out.
Mark Eric Smith: Excellent.
Mark Eric Smith: Can you just give us some more insight on that.
Mark Eric Smith: The short and long term impacts primarily on your business more so than kind of a broad cannabis industry.
Mark Eric Smith: Including kind of longer term.
Mark Eric Smith: Increased competition that could come in the lending space.
John Mazarakis: Thanks, Mark. We don't expect anything to change with respect to the announcement for another 18 to 24 months. Gilpatrick and Towson have a very nice report prepared.
Mark Eric Smith: Sure.
Speaker Change: Thanks Mark.
Mark Eric Smith: Don't expect anything to change with respect to the announcement for another 18 to 24 months.
John Mazarakis: And this is just the first step. Nothing has really been accomplished yet. So we're just waiting to see. So I think, you know, any impact, if there is any, will be after the 24-month mark.
John Mazarakis: So Patrick 10000 had a very nice report prepared.
John Mazarakis: And this is just the first step.
John Mazarakis: Nothing has really been accomplished yet so we're just waiting to see.
John Mazarakis: So I think any impact.
John Mazarakis: Or when there is an impact.
John Mazarakis: After the 24 month Mark.
John Mazarakis: As we think about it, and I know there's just a lot of unknowns on what could really happen though, you know, obviously a lot of positives that come from this for the entire industry, but anything you can speak to as you look at, you know, competition for you guys and maybe how that landscape changes, you know, over time with this, or or would we have just would it need to be more regulatory changes to see kind of traditional lenders and others kind of come more into the space?
John Mazarakis: Okay.
John Mazarakis: As we think about it I know theres, just a lot of unknowns on what could happen, though obviously a lot of pass throughs.
John Mazarakis: It comes from this for the entire industry, but.
John Mazarakis: Anything you can speak to as you look at competition for you guys and maybe how that landscape changes.
John Mazarakis: The time with us.
John Mazarakis: Or is or would rehab just would it need to be more regulatory changes to see kind of traditional lenders and others kind of come more into the space.
John Mazarakis: I think, Mark, more of the latter. I can sit here and just be speculative. The truth is, based on multiple recent deals that we've seen across the platform, there are no signs of competition. So that's the report based on data. On a more speculative basis, obviously, capital is efficient, and at some point, likely, probably after 24 months, we will start seeing compression. So I can't speak further to that point.
Mark: Mark more of the latter.
John Mazarakis: I can sit here and just be speculative the truth is based.
John Mazarakis: Based on multiple recent deals.
John Mazarakis: That we've seen across the platform there.
John Mazarakis: There are no sign where competition. So that's that's our report based on data.
John Mazarakis: On a more speculative basis, obviously capital is efficient and at some point.
John Mazarakis: Likely probably after 24 months.
John Mazarakis: We will we will start seeing.
John Mazarakis: <unk>, so I can't I can't speak further to that point.
John Mazarakis: Okay, that's fair, and any changes you know as we look at the industry and kind of what's happening with operators out there today, any changes here in the near term that you guys saw over the quarter, positive or negative, or maybe even any states to call out that are maybe picking up.
Speaker Change: Okay. That's fair and then just any any changes.
John Mazarakis: As we look at the industry and kind of what's happening with operators out there to date any changes here in the near term that you guys saw over the quarter positive or negative.
John Mazarakis: Maybe even any states to call out that are maybe picking up.
John Mazarakis: I think our interaction with operators has been very positive. I think credit worthiness is improving, as we can see from the public markets, just purely on a quantitative basis. But more importantly, we only deal with operators that kind of meet the criteria that we set forth in the last 24 months.
John Mazarakis: I think our interaction with operators has been very positive.
John Mazarakis: I think the credit worthiness is improving as we can see from the public markets just purely on a multiple basis, but more importantly.
John Mazarakis: We only deal with operators that kind of meet the criteria that we set forth in the last 24 months.
John Mazarakis: [inaudible] The credits have been very, very strong. EBITDA has been very strong. And we haven't really focused on any early stage operations. There's plenty of capital to be deployed in mature businesses with meaningful EBITDA numbers.
John Mazarakis: The the credits have been.
John Mazarakis: Very very strong EBITDA has been very strong.
John Mazarakis: <unk>.
John Mazarakis: We haven't really focused in any early stage operations, there's plenty of capital to be deployed in mature businesses with meaningful EBITDA numbers.
Operator: Excellent. Thank you. Thank you. As a reminder, to ask a question, you will need to press star one on your telephone and wait for
Speaker Change: Excellent. Thank you.
Speaker Change: Thank you.
Operator: As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. One moment for our next question. One moment, please.
Operator: As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.
Operator: One moment for our next question.
Operator: One moment please.
Operator: We are showing no further questions at this time. Thank you so much for your participation in today's call. Feel free to follow up with any questions you may have. This does conclude our program. You may now disconnect.
Operator: We are showing no further questions at this time thank.
Operator: Thank you so much for your participation in today's call feel free to follow up with any questions you may have.
Operator: This does conclude our program you may now disconnect.
Operator: Okay.
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Operator: Okay.
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