Q2 2024 Chicago Atlantic Real Estate Finance Inc Earnings Call
Yeah.
[music].
Operator: Good day, and thank you for standing by. Welcome to Chicago Atlantic Real Estate Finance, Inc.'s second quarter 2024 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 this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to introduce the host for today's conference, Mr. Tripp Sullivan of Investor Relations. Please go ahead.
Unknown Executive: 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 filing with the SEC. A live audio webcast of this call is being made available today.
Unknown Executive: 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 laws, including statements related to the future performance of our portfolio, our pipeline of potential loans and other investments, future dividends, and financing activities.
Unknown Executive: 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.
John Mazarakis: Thanks, Tripp. Good morning, everyone.
John Mazarakis: The possible federal rescheduling, the addition of adult use on the ballot in Florida this November, and the optimism surrounding the Ohio adult use rollout have many of our operators and those in our pipeline planning for future growth. We'll be ready to help them grow. We are focused on attractive risk-adjusted returns that provide an appropriate spread over our cost of capital with exceptionally strong coverage and collateral. Until federal legalization is passed, we will continue to underwrite new loans as if rescheduling never happened.
John Mazarakis: We are never surprised on the downside and like to think that we have already accounted for the potential upside of any opportunity. Our pipeline across the Chicago Atlantic platform currently stands at $508 million. We're still prioritizing operators in limited-licensed states and those positioned to transition from medical to adult use. That means we're active in Maryland, Missouri, Minnesota, and Ohio. With investments in Florida-based assets accounting for 12% of our portfolio at quarter end, we believe we're very well positioned to continue backing the best operators in that state if adult use is ultimately approved.
Speaker Change: Characterizing operators in limited license states and those positioned to transition from medical to adult use that means we're active in Maryland, Missouri, Minnesota, and Ohio with investments in Florida based assets accounting for 12% of our portfolio at quarter end. We believe we're very well positioned to continue backing the best operators in that state if adult use.
Speaker Change: This is ultimately approved with.
John Mazarakis: We once again deployed the ATM program to source accretive capital. During the quarter, we issued approximately 410,000 shares at a weighted average price of $1,576,000, raising net proceeds of approximately $6.3 million. Each issuance was transacted at a premium-to-book value. Peter, why don't you take it from here?
Peter: We once again deployed the ATM program to source accretive capital during the quarter, we issued approximately 410000 shares at a weighted average price of $15 76, raising net proceeds of approximately $6 $3 million. Each issuance was transacted at a premium to book value Peter why don't you take it from here.
Peter: Good morning.
Peter Sack: As of June 30, our loan portfolio totaled $383 million across 31 portfolio companies with a weighted average yield to maturity of 18.7%. That's down from 19.4% as of March 31, due to primarily two idiosyncratic actions related to de-risking. In one instance, a loan that is priced on a grid relative to performance shifted down in its pricing due to strong execution and performance by the borrower. In a second instance, we refinanced the position to create stronger real estate collateral and accept the lower return profile in the process.
Peter: As of June 30, our loan portfolio totaled $383 million across 31 portfolio companies with a weighted average yield to maturity of 18, 7%.
Peter: That's down from 19, 4% as of March 31, due to primarily to idiosyncratic actions related to Derisking.
Peter: In one instance alone that is priced on a grid relative to performance shifted down in pricing due to strong execution and performance of the borrower.
Peter: Second instance, we refinanced the position to create stronger real estate collateral and accept a lower return profile in the process.
Peter Sack: Our weighted average loan to enterprise value was 42% compared with 40.5% as of March 31. Gross Originations were $20.9 million of principal funding, of which $11.2 million and $9.7 million were funded to new borrowers and existing borrowers, respectively. We had an unscheduled principal repayment on loan number one for $4.3 million during the quarter, which together with new originations contributed to the approximate $6 million in portfolio growth. The percentage of our portfolio that is floating rate based off the prime rate remained at approximately 76% compared with March 31st.
Peter: Our weighted average loan to enterprise value was 42% compared with 45% as of March 31.
Peter Sack: As of June 30th, we had $76.8 million outstanding on the facility, and we've subsequently grown down another $4.5 million. That leaves us with a total of approximately $31.5 million in operational liquidity, net of estimated liabilities. The facility is our primary means of funding New Originations, along with the continued disciplined execution on the ATM program. Given the substantial spread we are earning on capital that we put into work with New Originations, we continue to explore other sources of capital that position us to accelerate deployment later in the year.
Peter Sack: We recognized approximately $0.1 million of prepayment fees during Q2. Unscheduled loan repayments remain largely unpredictable, and we believe the second quarter net interest income remains representative of the current portfolio's run rate performance. Total operating expenses before the provision for credit losses increased approximately $150,000 from Q1 2024, primarily resulting from incremental stock-based compensation of $300,000 resulting from restricted stock award grants made during the second quarter. Other administrative and professional fees remained relatively consistent, decreasing by $100,000 in Q2 compared with Q1.
Peter Sack: Our CECL reserve as of June 30, 2024, was approximately 5.1 million compared with 5.4 million as of March 31. And on a relative size basis, our reserve for expected credit losses represents 1.3% of outstanding principal. In July, we distributed the second quarter regular dividend declared by our board of 47 cents per common share, which was consistent with the prior quarter and the second quarter of last year. Our book value as of June 30th was $14.92 per common share compared with $14.97 as of March 31st.
Operator: Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Unknown Caller: Thank you and good morning, everyone. First, just let me talk about the potential for a pickup and origination in the second half of the year. Can you discuss your capacity to take advantage of those opportunities? I think you mentioned you have $24 million available in the credit facility. So are there other actions you think you need to take either on the debt side or continue to tap the ATM to fund those originations? Or do you feel good from a capacity perspective here?
Unknown Caller: Thanks.
Operator: Please remain on the line. Your conference will begin momentarily and will resume shortly.
Speaker Change: We're excited for the opportunities that are in front of US there is a.
Unknown Executive: A pretty profound change in optimism in the industry, additional investment, additional growth opportunities, additional M&A, and we continue to evaluate opportunities in the market for additional debt and equity capital to take advantage of those opportunities.
Speaker Change: Pretty profound change and optimism in the industry additional investment additional growth opportunities additional M&A and we continue to evaluate opportunities in the market for additional debt and equity capital to take advantage of those opportunities.
Unknown Executive: Alright, thank you. I appreciate that. And then, just with the presidential election just a few months away, along with other state elections, I think you mentioned Florida specifically, where can you discuss what you might be looking for leading up to and post-election from a cannabis perspective? And what are some of the pros and cons that could come from them and impact the business over the near and intermediate term?
Speaker Change: Alright. Thank you I appreciate that and then it's just what the cause of that until last one just a few months away along with other state elections, I think you mentioned, Florida, specifically, but can you discuss what you might be looking for leading up to and post the election.
Speaker Change: Actions from a Canada perspective, what are some of the pros and cons that could come from them and impact the business over the near and intermediate term.
Unknown Executive: I think all eyes are on rescheduling and how that process unfolds prior to the election. And we're hopeful that as much of the rulemaking process as possible can occur before the election. But we'll have to see, and I think there's a lot of uncertainty as to what will be accomplished before the election and how the election and a new presidency may impact that. I think one of the positives of an election, regardless of who's on the ballot, is greater dialogue about this topic and about greater liberalization of cannabis policies, both at a federal level and at a state level. And I think the history of the last 10 years has shown that that dialogue tends to lead to progress, even if it's slow and even if it is halting at times.
Speaker Change: I think there is an immediate in the I think all eyes are on rescheduling and how that process unfolds prior to the election.
Speaker Change: And we're hopeful that as much of the rulemaking process as possible can occur before the election.
Speaker Change: But but we'll have to see and I think theres a lot of uncertainty as to what will be accomplished before the election and the election.
Speaker Change: And a new presidency may impact that.
Speaker Change: I think one of the positives of an election, regardless of who is on the ballot is greater dialogue about this topic.
Speaker Change: And about greater liberalization of cannabis policies, both at a federal level and state level and I think the history of the last 10 years has shown that.
Speaker Change: That dialogue tends to lead to progress, even if it's slow and even if it is.
Speaker Change: Halting at times.
Speaker Change: Great. Thank you and then just one last quick one from me just on scheduling can you just update us where we stand today and then just on any key milestones you're looking for over the near to intermediate term I think you've talked about kind of the rule.
Speaker Change: Processes ranking, but but any other detail there and congratulations thanks.
Unknown Executive: We're looking forward to the outcome of the review of the comment period. I think that's probably the next benchmark on the horizon. And then I think there's a lot of uncertainty. And at Chicago Atlantic, we don't have a secret crystal ball to evaluate how the DOJ will proceed in this process, and so we're underwriting our loan book appropriately. I think you'll continue to see a conservative approach from us until there is more certainty about rescheduling and what a formal rule looks like and what potential challenges to that rule look like.
Speaker Change: We're looking for.
Speaker Change: The outcome of the review of the comment period, I think thats, probably the next the next benchmark on the horizon.
Speaker Change: And then I think theres a lot of uncertainty and.
Speaker Change: At Chicago Atlantic, We don't have a secret crystal ball to about to evaluate how the Doj will proceed in this process and so were underwriting our loan book appropriately.
You'll see you'll continue to see a conservative approach from us until there is more certainty on rescheduling and what a formal rule looks like and what potential.
Speaker Change: <unk> to that rule looks like.
Unknown Caller: Great. Thank you, Peter. Appreciate you taking my question.
Speaker Change: Great. Thank you Peter I appreciate you taking my questions.
Operator: Thank you, and one moment for our next question, please.
Speaker Change: Thank you one moment for our next question. Please.
Speaker Change: And our next question comes from the line of Mark Smith with Lake Street. Your line is open. Please go ahead.
Unknown Caller: Hi guys. First question for me: just wanted to ask about kind of new states, you call them Ohio, Minnesota, some others, you know, kind of what you're seeing from newly legal states, as well as anywhere where you see geographic strength, or we do.
Mark Smith: Hi, guys first question for me just wanted to ask about kind of new states, you called out kind of Ohio, Minnesota Some others.
Speaker Change: Kind of what Youre seeing from from newly legal states as well as anywhere where you're seeing geographic strength or weakness.
Mark Smith: Mhm.
Unknown Executive: I think the news out of Ohio this week has been very exciting, and we've seen flash numbers from our borrowers in Ohio from the first day of adult use sales that are extremely encouraging about the prospects for that state, and I expect we're going to continue to see opportunities to lend as existing dispensary owners who received additional licenses seek to build out their footprint and as the wholesale market looks to catch up with demand. Depending on the outcome of the ballot initiative in Florida in November, we're going to see additional opportunities to deploy in that state, and we are cautiously optimistic about the outcome of that referendum. Pennsylvania is in the center of the industry's focus to see where the debate on adult use will lead.
Speaker Change: I think the news out of Ohio. This week has been very exciting and we've seen flash numbers from our borrowers in Ohio from the first day of of adult use sales that are extremely encouraging about the prospects of that state and I expect we're going to continue to see opportunities to deploy as the recipient.
Speaker Change: As existing dispensary owners, who received additional licenses seek to build out their footprint and as the wholesale market looks to catch up with demand.
Speaker Change: Hi.
Speaker Change: Depending on the outlook on the results of the ballot initiatives in Florida in November we're going to see additional opportunities to deploy in that state and we are.
Speaker Change: Cautiously optimistic about the outcome of that.
Speaker Change: Of that referendum.
Pennsylvania.
Is is in the center of the industry's focus to see.
Speaker Change: Where the debate on adult use will lead.
Speaker Change: And I think smaller state of Kentucky's Medical program is and it is an interesting example of of.
Speaker Change: Our new medical program in a.
Speaker Change: Conservative jurisdiction that I think will present opportunities for us and others.
Speaker Change: Perfect and then any thoughts I know, you're just kind of said that you don't have a crystal ball, but if youre seeing any change.
Speaker Change: Changes or kind of early green shoots around kind of build out ahead of <unk>.
Speaker Change: Potential rescheduling or are you seeing people start to make moves or is everybody really just kind of a wait and see mode until there is something more concrete.
Speaker Change: Okay.
Speaker Change: Operators are operators are.
Speaker Change: I think some operators are making more aggressive moves some are making more conservative moves.
Speaker Change: But that optimism has definitely led to additional that optimism has definitely led to additional.
Speaker Change: Sure.
Speaker Change: Willingness to take risk.
Speaker Change: I think it wasn't there six months ago or a year ago.
Speaker Change: Perfect. Thank you guys.
Speaker Change: Thank you showing no further questions ladies and gentlemen, this will conclude today's conference call. Thank you for participating and you may now disconnect everyone have a great day.
Speaker Change: Yeah.
Speaker Change: [music].
Okay.
Speaker Change: Yes.
Speaker Change: [music].