Q1 2025 Chicago Atlantic Real Estate Finance Inc Earnings Call
[inaudible]
Thank you.
Speaker Change: Good day, and welcome to Chicago Atlantic Real Estate Financing, first quarter, 2025 Warnings
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I would now like to turn the conference to…
Trey Sullivan
with investor relations, please go ahead.
Speaker Change: Thank you. Good morning. Welcome to the Chicago Atlantic Real Estate Finance Conference call to review the company's results. On the call today will be Peter Sack, Co-Chief Executive Officer, David Kite, Chief Operating Officer, and Phil Silverman Chief Financial Officer.
Speaker Change: Our results for release this morning in our earnings press release which can be found on the
Speaker Change: Live Audio Webcast in 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 and will not be updated subsequent to this call.
Speaker Change: During this call, certain comments and statements we make may be deemed forward-looking statements within the meeting 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.
Speaker Change: 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 extra results to differ materially from our current expectations.
Speaker Change: Investors are urged to carefully review various disclosures made by the company including the risk and other information disclosed in the company's filing with the SEC.
Speaker Change: We also will discuss certain non-GAAP measures , including but not limited to distinguishable earnings. Definitions of these non-GAAP measures and reconciliation to the most comparable GAAP measures are included in our filings with the SEC.
Speaker Change: and now turn the call over to Peter Sack. Please go ahead.
Thank you, Chip. Good morning, everyone.
Speaker Change: At Chicago Atlantic, we place credit and collateral first and seek to add value to our borrowers through collaboration and then evolving industry.
Speaker Change: We are a leader in cannabis lending with a team of industry experts, originators and underwriters.
Speaker Change: From day one, we have underwritten our portfolio assuming that the regulatory environment at the federal level does not improve.
Speaker Change: We seek to provide our investors downside protected returns and consistent yield regardless of fleeting sentiment and related equity volatility.
Speaker Change: That same volatility drives other capital for riders to exit or scale back to presence.
Chicago Atlantic: Amid this industry uncertainty, we believe Chicago Atlantic is a constant that borrowers and investors can count on. We deploy capital with consumer and product focused operators in limited license jurisdictions at low leverage profiles to support fundamentally sound growth initiatives.
David Kite, John Mazarakis, Harry Sullivan, Phillip Silverman, Phillip Silverman, Phillip Silverman, Phillip Silverman, Phillip Silverman
Chicago Atlantic: In some quarters, that means that originations are at a strong pace, and others like Q1 are at a slower pace.
Chicago Atlantic: Investments are driven by credit and our ability to protect principle and achieve strong risk-adjusted returns.
Chicago Atlantic: If those opportunities aren't there for a period of time, we believe that the right decision is to be disciplined and patient.
Speaker Change: The cannabis pipeline across the Chicago Atlantic platform now stands at 462 million.
Speaker Change: There continue to be a number of well-run and well-capitalized operators that will need to address upcoming maturities over the next 12 months, and we believe we will earn our fair share of those opportunities.
Speaker Change: If you've heard me say before, our goal is to create a differentiated and little levered risk-returned profile. It is implemented from cannabis equity volatility and outperforms our industry agnostic mortgage
Speaker Change: Updateing the analysis we've provided last quarter, I'm pleased to note that despite all of the volatility in the broader financial services market, we remain the number three top performing exchange listed more to treat.
Speaker Change: We have a slide in our supplemental that walks through this analysis. We're quite proud of this achievement and have our site set on being number one.
Speaker Change: I'll close with the statistic. Sincarned section without performed the median and
Speaker Change: For all exchange listed mortgage reads by approximately 51% and 55% respectively.
David wants you to take it from here [inaudible]
Thank you, Peter.
David Kite: As of March 31, our loan portfolio principal told 407 million across 30 portfolio companies with a weighted average yield to maturity of 16.9% compared to 17.2% for the fourth quarter, primarily due to the restructuring of loan number 9.
David Kite: Gross originations during the quarter were 4.4 million of principle fundings of which 0.5 million and 3.9 million was funded to new and existing borrowers on delayed draw term loan facilities respectively.
These were offset by sales and repayments of 9.2 million.
David Kite: As of March 31, 2025, the percentage of portfolio comprised of fixed rate loans and floating rate loans with floors greater than or equal to the prevailing prime rate with 71.2%.
David Kite: The other 28.8% of the portfolio that remains floating is not exposed to interest rate caps at current levels.
David Kite: While the rate outlook is still uncertain, due to the volatility, Peter referenced earlier, we believe we have positioned the portfolio to limit the impact of interest rate declines and benefit should interest rates rise by adjusting the mix of floating and fixed rate loans and negotiating high floors.
David Kite: Total leverage equal 28% of book equity at March 31, compared with 34% at December 31, 2024.
David Kite: Our debt service coverage ratio on a consolidated basis for the quarter was approximately 6.2 to 1 compared to the requirement of 1.35 to 1.
David Kite: As of March 31, we had 38 million outstanding on our senior secured credit facility and had fully drawn down 50 million on our unsecured term loan.
David Kite: As of today, we have approximately 43 million outstanding on the senior credit facility and total liquidity of 65 million.
David Kite: Lastly, I'd like to provide an update on loan number nine. As we discussed last quarter, the administrative agent completed key milestones in the foreclosure on select operating assets of the borrower of loan number nine.
David Kite: Members of the Administrative Agent, which are related parties, were successfully affiliated with the Pennsylvania Department of Health as principals, giving them full operational control of these assets for benefit of the lenders.
David Kite: The aggregate proceeds from the foreclosure, which included the equity acquired via the UCC Article 9 sale and the court ordered judgment awarded, was distributed by the agent to the company and the other co-lenders.
David Kite: Given the company's restriction from holding equity investments in plant-touching cannabis operations, the company acquired new loans totaling approximately 16.5 million which remained senior secured by the borrower's real estate assets and accrued interest at a fixed rate of dying percent.
David Kite: The borrower's three dispensaries, which were previously non-operational, are now open.
with the most recent opening occurring on April 30th.
David Kite: Revives New Loan as Senior Secured and at the top of the Capitol Structure.
David Kite: Given the senior-secured nature of the restructured asset in the commencement of operations, we reverse approximately 1.2 million of the CISO reserve related to loan number 9.
David Kite: It will take some time to get the operations where they need to be, but we hope that through this operational and balance sheet restructuring, we may restore this loan to a cruel status this year. I'm now turning it over to Phil.
Phil: Thanks, David. Our net interest income of 13 million for the first quarter represented a 7.3% decrease from 14.1 million during the fourth quarter of 2024.
Phil: The decrease was primarily attributable to the decrease in non-recurring prepayment make hole exit and structuring fees which amounted to $0.4 million for Q1 2025.
Phil: compared with 1.5 million in Q4 2024, as well as a full quarters impact of the 50 basis point decreases in the prime rate from the back half of the fourth quarter.
Phil: Total interest expense including non-cash amortization of financing costs for the first quarter was consistent with Q4 2024 at approximately 2.1 million.
Phil: The company incurred a full quarter of interest expense on our unsecured notes which closed in mid-October last year and bear interest at 9%.
Phil: The weighted average borrowings on our revolving loan, with spare interest at the prime rate plus an applicable margin based on our leverage ratio, increased to 41.6 million from 23.3 million during the fourth quarter.
Phil: As of today, there's approximately 67 million available on our revolving loan.
Phil: Total professional fees in general administrative expenses decreased quarter over quarter by approximately 300,000, primarily due to expense reimbursements to our manager which were approximately 1.1 million for Q1 compared to 1.4 million in the prior quarter.
Phil: Our Cecil Reserve on our loans held for investment as of March 31, 2025 was approximately 3.3 million compared with 4.4 million as of December 31, 2024.
Phil: The decrease in reserves was primarily attributable to the reversal of 1.2 million of credit loss relating to loan number 9, which was restructured in Qon 2025, as David discussed.
Phil: On a relative size basis, a reserve for expected credit losses represents 83 basis points about outstanding principle of our loan's health or investment.
Phil: On a weighted average basis, our portfolio maintained realistic coverage of 1.1 times.
Phil: Our loans are secured by various forms of other collateral in addition to real estate, including UCC-1 all asset leans on our borrower credit parties.
Phil: These other collateral types contribute to overall credit quality and lower loan to value ratios.
Phil: Our portfolio is alone to enterprise value ratio of 47.5% as of March 31st, 2025, calculated as senior indebtedness of the borrower divided by the fair value of total collateral.
Phil: During the first quarter, we raised approximately 1 million of net proceeds for issuance of Common Stocks through our ATM program.
Phil: The weighted average selling price, net of commissions of $15.69 represents a premium to our March 31st book value of approximately five and a half percent.
Phil: Distributable earnings per weighted average share on a basic and fully diluted basis was approximately 47 cents and 46 cents for the first quarter, which is consistent with the fourth quarter of last year.
Phil: In April , we distributed the first quarter dividend of $0.47 per common share declared by our board in March 2025.
Phil: Our book value was 1487 and 1483 per common share as of March 31st, 2025 and December 31st, 2024, respectively.
Phil: On a fully diluted basis, there were approximately 21.3 million common shares outstanding as of March 31st, 2025.
Phil: As we shared on our call last quarter, we are expecting to maintain a dividend payout ratio based on our basic distributable earnings per share of 90% to 100% for the 2025 tax year.
Phil: If our taxable income requires additional distributions and access of the regular quarterly dividend to meet our taxable income requirements, we would expect to meet that requirement with a special dividend in the fourth quarter.
Operator, we're now ready to take questions.
[inaudible]
[inaudible] David Kite, David Kite, David Kite,
Thank you.
We will now begin the question and answer session.
Phil: To ask a question, you may press star then one on your telephone keypad.
Phil: If you are using a speakerphone, please pick up your handset before pressing the keys.
Phil: If at any time your question has been addressed and you would like to withdraw your question, please press star, then two.
Phil: Our first question comes from the line of Aaron Grey from Alliance Global Partners. Please go ahead.
Aaron Gray: Good morning and thank you very much for the questions here.
First question for me, just in terms of...
Aaron Gray: The near-term pipeline of 462 million you guys had there so it remains healthy.
Aaron Gray: Twinult, you can speak to how many are in there and what stages they're in, how many are in the later stages if we get a better sense of.
Aaron Gray: How we think that translates into new originations in 2025, I know you don't provide guidance but maybe even some incremental color on the types of appealing opportunities you're seeing in that pipeline, but they're not there more so you know catbex bills or M&A any color that will be appreciated. Thank you.
Aaron, thanks for the question. Type line is...
a pipeline is generally related to cat-backs.
Aaron Gray: We expect deployments to accelerate in Q2 and Q3 at this year, but it's difficult to get further detail beyond that.
Okay, no great. That's all for there. Thanks, Peter.
Speaker Change: Cypher me kind of a high level one, pricing pressure is something that continues to be a meaningful factor for the industry.
Aaron Gray: As you're doing your underwriting, you know, what are some of the pricing assumptions?
Speaker Change: You're making and it's becoming a greater factor as we've seen some once limited license markets such as Massachusetts mature and we try some levels you know similar to open license markets. You know just curious if you've adjusted you know the pricing that you make of pricing centers you make and you're underwriting versus you might have a year or two ago. Thank you.
Aaron, it's interesting, we've always considered pricing in the industry.
Speaker Change: to be evolving. And that even in all states, there is a curve of development, the pricing that changes as a state begins its medical program, even a limited license state, begins its medical program, launches adult use, and that adult use program matures.
Speaker Change: and nearly every jurisdiction has some form, some downward slope, a price compression. It's simply that in some states, that price compression is much slower than others.
Speaker Change: and so in the case of Massachusetts, as an example, over the past years, we have...
Speaker Change: We've significantly and but gradually reduced our exposure to a state like Massachusetts because we saw the pricing price and pressure on the horizon.
Speaker Change: and that's one of the benefits that we as a lender, one of the levers that we as a lender have operating in this industry where an operator would be less flexible.
that with a relatively short duration loans.
Speaker Change: We have opportunities to accept a maturity, get paid back, and then not deploy a new capital into XYZ state, and it's much more difficult for an operator to do that.
as we are when we look to the ploy.
Existing Pricing
Speaker Change: and where we think that state sits in its progression of price compression is a key factor in terms of how we think about leverage and how we think about risk and to the extent that we can diversify that all the better.
Speaker Change: Okay, great. That's a really helpful call out there. I appreciate it. I'll go ahead and drop back in the queue.
Thank you.
Speaker Change: The next question comes from Chris Muller from JMP Securities. Please go ahead.
Chris Mueller: Hey guys, thanks for taking the questions. So maybe following up on that first question a little bit, how much visibility do you guys have into repayments in the near term? And should we expect to see some net portfolio growth in 2025? And I'm not looking for any specifics there, maybe just a general trend.
Dennis? [inaudible]
Speaker Change: Our aim is to have net portfolio growth in 2025. There are significant number of maturities in 2025.
Speaker Change: Most of which we will be competing to refinance and to keep the relationship with the borrower, as we believe, that
Yes, it's a performing strong.
of the company's head.
Speaker Change: Delivered or had strong attractive opportunities to either provide additional capital or to maintain a lending relationship with them. And so our aim for the vast majority of materials in 2025 will be to compete to win the business.
and refinance those positions with new facilities.
Speaker Change: Guy, that's very helpful. And then I know this comes up a lot and probably sounds like a broken record at this point, but it seems like rescheduling talks are picking up again, following some comments from the new DEA nominee. So I guess from a high level. Can you guys just talk about how rescheduling would impact your business if it actually does get done? Yeah.
Mm-hmm.
Speaker Change: I think we'd like to see rescheduling and we'd like to see greater clarification of how past two tax liabilities from prior years will be treated going forward.
Speaker Change: clarity on both of those would be highly accretive for what we do for rescheduling the elimination of 2 ADE on a go-forward basis increases the...
Aftertax Street Cash Flow of all of our borrowers significantly.
Speaker Change: It allows them to increase the downsides protection of our debt facilities.
Speaker Change: It provides greater capital for growth, provides more equity value and equity dollars, and cash flow that can support additional leverage, and should accrete to equity valuations of the market at large.
Speaker Change: which we hope would then lead to greater activity of M&A, of capital expenditures.
David Kite, John Mazarakis, John Mazarakis, John Mazarakis, John Mazarakis,
and overall, this is the eliminate general market uncertainty that exists today.
at the same time.
Speaker Change: At the same time, what we think we're scheduling is likely to lead too much more.
Speaker Change: Expansion, and Opportunity, and Expansion evaluations, and growth of participants in the equity markets of cannabis. We think that greater participation of other lenders and debt capital in the cannabis space will take much more time.
and require greater reforms and simply reschedule.
Speaker Change: God, and maybe over a longer period of time would you expect yields to generally compress but leverage with move up to kind of move towards that more typical mortgage read model?
Speaker Change: You know, I think we have to, you have to see additional entrants come into the market in order to lead to yields compressing.
Speaker Change: and I have yet to see significant evidence of significant new entrance to the market, simply on the basis of risk adjoining, but we'll see.
Speaker Change: The great setup for the people already in the space and you guys are doing a great job. Thanks for taking the questions.
Speaker Change: I think so. And I guess my dad said I think that I think that some of the largest publicly traded operators will probably be the best. The first.
Speaker Change: the first to benefit from rescheduling and lower cost of capital.
Speaker Change: especially equity capital. I think that the next year of middle-market companies and lower-middle-market growing companies operating in the space, it will take more time for...
Speaker Change: for capital providers, if any, do come to provide significant new options for that size and profile operator.
Thanks a lot, and thanks for taking the questions again.
Thank you.
Pablo Zuanich: The next question comes from Pablo Zuanic, from Zuanic, please go ahead.
Pablo Zuanich: Thank you, good morning everyone. I'm sorry to go back to the question about the net portfolio growth, but
Pablo Zuanich: You know new fundings, but thank you in the first quarter I think about 4 million.
Speaker Change: You did 161 million in the full year, almost 85 in the fourth quarter. That's a big change in terms of numbers. Does that imply that you become more cautious on the industry outlook over the last three months or last six months?
Speaker Change: What should we be assuming for the full year? I mean, just basic, very limited portfolio growth, if you can just add more color there please Thank you
Speaker Change: Thank you, Pablo. We are seeking to grow the portfolio, to grow the portfolio meaningfully throughout the year.
Speaker Change: Q-1 was a quarter of a limited deployment. It was driven by two factors. One was selectivity on our part.
and two is subactivity, and not subactivity, it was- [inaudible]
Speaker Change: and greater consideration among operators in the whole industry. We saw in Q4 and Q1 some of the lowest valuations of cannabis public equities that the markets have ever seen.
Speaker Change: and I think that's led a lot of operators to think about their capital planning needs, think about their growth projects and wait to see if some...
Speaker Change: items of uncertainty in the market change for making that next decision. And so I think it is a both a combination of caution and selection on our side. And
Speaker Change: Costion and selection on the part of operators in the space in light of uncertainty in the industry.
Speaker Change: I can't finish going through a 10 cube, but can you talk about the unfunded commitments for the new quarter?
Phil, would you like to take that?
Phil: Yeah, yeah, sure. Hey, Pablo, we have about 19.8 million of unfunded commitments. Those are earmarked pursuant to the credit agreements in certain cases.
Phil: I'm related to construction milestones or other projects that each of the borrowers are you know thinking about in the future so we all need to play those if the conditions are met.
Phil: and in some cases, their discretionary considerations that we as the Wanderer can make before deploying those. So I think it's a little bit uncertain in terms of timing of when those may be deployed.
Phil: God, thank you. Look, I'm going to make you a panel deal with Sail Leastberg and I understand it's a whole different industry.
You know, we saw the IAPR for McKinnon situation.
Phil: I think IPR was very concerned about whether negotiating there would set a precedent.
Phil: and that we're willing to do so when we need to.
and I forget it.
shows that...
Phil: Lending in the cannabis space, even with uncertainties around, not having access to bankruptcy courts.
Phil: and one last one. I mean, the way I understand it.
Phil: Some of the officers in these companies work also at the group level. They are part of the manager's team if I'm not wrong. I'm just trying to understand when shareholders are looking at the talk about the pipeline. Sometimes the pipeline is a number that's at the Chicago Atlantic group level.
Phil: and some of that is going to get allocated to a new fundings reallocated to the group, private group, to the mortgage read, or maybe now to the BDC that's also a publicly listed vehicle. Then you talk about how the how the allocation process works in practice.
Phil: to Chicago Atlantic Personnel or Equal Produce Series to each of our funds.
Phil: and more core all opportunities that arise are given equal opportunity to be funded by each of the funds.
Phil: that being said, any one of the funds, including the reap.
Phil: May decline to participate in a deal if it does not meet the requirements of the vehicle diversification requirements.
Phil: or other limitations that might make it eligible for participation. And so, it's challenging during the evaluation of an opportunity until the end of the process to have certainty of what.
Phil: of what amount of the pipeline or what amount of a specific deal would be eligible and allocatable and expected to be allocated to one vehicle or another, whether that is the mortgagery, the VDC, or another vehicle.
Phil: And that is the reason why we provide a total pipeline number and not a more specific vehicle-specific pipeline number.
Got it. Thank you very much.
Thank you.
Speaker Change: There appears to be no additional questions. This concludes our question and answer session.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation.