Good morning, afternoon, evening, and welcome to the Chicago Atlantic Real Estate Finance Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask a question. Please note this event is being recorded. I would now like to turn the conference over to Trip Sullivan. Please go ahead..

Thank you. Good morning. Welcome to the Chicago Atlantic Real Estate Finance Conference Call to review the Company's results for the second quarter of 2022.

On the call today will be John Mazarakis, Executive Chairman; Tony Cappell, Chief Executive Officer; Andreas Bodmeier, Co-President and Chief Investment Officer; and Lindsay Menze, Chief Financial Officer.

Our results were released this morning in our earnings press release, which can be found on the Investor Relations section of our website, along with our supplemental filed with the SEC. A live audio webcast of this call is being made available today.

For those who listen to the replay of this webcast, we remind you that the remarks made herein are as of today, August 9, 2022, 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.

All forward-looking statements represent Chicago Atlantic's 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.

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.

Definition 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..

Thanks, Tripp. Good morning, everyone, and thank you for joining us. We have a real tale of two cities today. On the one hand, our fundamentals are strong in the states where we are focused and within our portfolio. On the other hand, the state of the stock market and the capital market in general is showing vulnerability.

We have invested a lot of time instilling the right perspective into the discussion around the growth potential of this industry, it's countercyclical nature and how it responds much like the pharmaceutical, alcohol, and tobacco industries.

The focus on limited license states and operators who are vertically integrated is a far superior approach in our opinion, to trying to pick winners and losers in crowded markets with significant price compression, destroying the margins of weaker operators.

What we've experienced to date backs up every thesis we've ever had about this industry and how well it can perform. As Tony will note in a moment, we are busier than ever across our platform. New markets such as New Jersey, New York, Ohio and others are gradually adding new licenses and creating new demand.

Our operators continue to be in good shape with lower leverage and no other debt on their capital structure, except ours. They have entrusted us with the growth of their business, and Chicago Atlantic will be there with them for the long-term. Private market and industry participants understand the real value we are creating.

In the public markets, everything in this sector appears to be trading at a fire sale.

I don't think it's our job to calm all fears about the broader market that we can control, but it is our responsibility to make the right strategic decisions to ensure the long-term growth of the REIT and the success of the platform we've established at Chicago Atlantic.

Until the broader capital markets can experience more stability and clarity, we have ruled out the pursuit of any debt or equity offering to provide additional growth in the REIT portfolio. Our threshold has always been that any new growth had to be funded with accretive capital.

It's obvious that is only available today in the form of our credit facility. Therefore, we are redoubling our efforts to expand our existing facility through its existing accordion feature or pursue other growth options that are accretive to book value.

As noted in our earnings release, we have provided a range of estimates for our expected performance in the second half of the year.

We are currently anticipating that Q3 and Q4, absent any additional increase in the facility would look a lot like Q2 with adjusted distributable earnings in the range of $1 to $1.05 for the second half of 2022, that would equate to $1.95 to $2 for the full-year of 2022.

We would also expect our dividend to be at least $0.47 per share for both quarters, which, if too conservative, might require a special dividend at the end of the year to true up our taxable income. Given what the market is presenting, we believe this is the right calibration to make for the REIT.

We are very under levered at only 17% to book value, and our dividend is well covered. We have a fortress balance sheet and generating strong returns for our shareholders. This is the right move to make for the REIT to date.

Tony, why don't you take it from here?.

Thanks, John. Good morning, everyone. 2022 has proven to be one of the more volatile years in a while both with macroeconomic issues, including inflation and rising interest rates and a lot of volatility within the cannabis industry.

More specifically on the cannabis market, we have seen some adjustments to reality on the pace of regulatory reform and price compression in many states, primarily the largest western states.

All of these challenges are why it's important to have robust structuring on the front-end as well as intensive loan monitoring during the borrower relationship. Cannabis lending is not high yield or liquid credit where you buy and sell paper in your Ivory tower. It is direct lending that requires a significant amount of oversight.

Some examples of our approach include all asset leads that encumber all of the borrowers' assets beyond the real estate, stock pledges on all of their subsidiaries, particularly those that own the license and getting some form of personal guarantee on the majority of our borrowers.

On the monitoring side, we employ strict financial covenants that provide early warnings that are designed to create tabling events long before you get any material deterioration in value.

And we require monthly reporting and covenant compliance in the vast majority of our borrowers so we were able to maintain the most up-to-date information compared with others who might wait 30 days after quarter end to get their data. As lenders, it's our job to underwrite risk.

As one of the first in the space of any size, I believe we've demonstrated we know how to do it and protect our capital. The demand for capital remains extremely strong. We intend to meet that demand through the Chicago Atlantic platform.

And when capital markets become less volatile, the REIT will be able to immediately increase its participation in the leading origination platform we have created. Now Andreas will walk us through our investments and capital plan..

Thanks, Tony. Good morning. At June 30, our loan portfolio had grown to total loan commitments of $357 million across 22 portfolio companies. It has a weighted average yield to maturity of 17.7%, up from 17.2% at March 31.

New originations during the quarter were $51 million, comprised of $17 million to a new borrower and $34 million of incremental advances to existing borrowers. During the quarter, we had one loan payoff at maturity. All loans are current and performing.

Our portfolio is currently 60% floating rate based off of the prime rate, so we have been able to effectively manage the impact of rising rates.

To reinforce what John said at the beginning of the call, there isn't a demand problem in the cannabis space at this time, whether we are talking about consumers or the demand from borrowers for growth capital.

The main issue from our perspective is the lack of available capital in this current environment to fund incremental growth on terms that would be accretive to book value. We have never contemplated a dilutive capital raise, whether debt or equity, an accretive rate has always been our threshold.

And if our stock has been trading down in anticipation that we would either lock in fixed interest rates at these elevated levels with long-dated maturities and or issue equity at huge discounts to prices that have existed for most of this year solely to grow the portfolio, then hopefully, today's comments have cleared that up.

I'll now turn it over to Lindsay to review our financials..

Thank you, Andreas. Turning now to our financial results for the second quarter. As expected, we saw the full benefit of the deployment of our IPO proceeds and the use of the credit facility in Q2. Net interest income increased sequentially to $11.4 million from $9.8 million in Q1.

Total operating expenses for the quarter were $2.9 million, which includes management and incentive fees of $1.2 million, G&A of $777,000, and professional fees of $744,000.

The incentive and management fees were up sequentially in line with the higher interest income while the other expenses were up as compared to prior quarter, primarily due to nonrecurring professional fees incurred during Q2. G&A is still within our previous guidance of $2.5 million to $3 million for the year.

Pursuant to ASC 326, we increased our provision for expected credit losses by $1 million in Q2 or $0.06 per weighted average diluted common share.

The company's reserve has not increased due to any specific factors impacting the credit quality of our borrowers, but rather is primarily due to our quarterly reevaluation of overall current macroeconomic conditions.

In determining this reserve, we noted that 95% of the portfolio is fully secured by real estate and 5% has limited or no real estate collateral. Our portfolio on average had real estate collateral coverage of 1.9x as of June 30, 2022. As Tony mentioned earlier, real estate is not our only collateral.

All of our loans are secured by equity pledges of the borrower and all asset leads.

While the CECL reserve was added back in our calculation of distributable earnings, consistent with previous quarters, recall that we are not adding back the incentive fees to our calculation of distributable earnings and adjusted distributable earnings to provide a clear indication of our ability to pay dividends to shareholders.

After factoring in these items, our adjusted distributable earnings per share was $0.50 per diluted share for Q2, up sequentially from $0.45 in Q1. Our book value as of June 30 was $15.13 per common share. Operator, we are now ready to take questions..

We will now begin the question-and-answer session. Our first question comes from Aaron Hecht with JMP Securities. Please go ahead..

Good morning, everyone. Thanks for taking my questions. John, you highlighted the capital markets volatility that's been going on out there, limited options of accretive capital available to you guys. Debt markets calmed down a little bit over the last couple of weeks.

Are you getting any closer to expanding that credit facility today, given what's going on with the markets? Or is that relatively closed off? And then secondly, are you considering any other potential financing options that are less traditional, maybe preferreds or converts?.

So I'm going to start from the second part of the question. We're not considering any other options. Any converges are off limits. We looked at them. Frankly, they don't make any sense. And in terms of the revolving facility, I think that's the best source of capital we can rely on. It's very inexpensive relative to our rates.

And I think we're going to double down and go after the remaining $35 million. And I believe within Q3, early Q4, we will probably have another $35 million as part of that facility as the markets hopefully are calming down on the debt side of the market..

Got it. And in terms of the near-term liquidity until you get that $35 million, I think you have a little over $25 million of commitments, $26 million of liquidity between your existing facility and cash. How do you manage that liquidity near-term? And how much do you need just to operate the business on a day-to-day basis..

So Aaron, I can take, go ahead, John..

No, no, I was going to say Tony, that's yours. Go ahead..

Yes. So for that, Aaron, a lot of that in terms of some of the commitments, there are some discretionary items in there in the credit facility. So there are some items there.

But for now, in the foreseeable future, the private fund has been taking all of the demand that would be normally slated for the REIT, and that has all been funded through the private fund..

Makes sense. Okay. Thanks. I’ll jump back in the queue..

Thanks, Aaron..

Our next question comes from Gaurav Mehta with EF Hutton. Please go ahead..

Thanks. Good morning. You made some comments about meeting demand through your Chicago Atlantic platform. And I think you just talked about the private funds.

So can you maybe provide some color on that side, the Chicago Atlantic platform and how you guys are meeting demand?.

Yes. The private fund, this was launched last year and has been raising money at a pretty fast pace ever since. So just to give you an example, year-to-date, we've funded about $120 million of deals and there's a fair amount of continued liquidity in that vehicle.

So the deals that are normally slated for the rate, the REIT rather, which are the fully real estate conforming, they're being funded through this, through the private fund. But normally, and once everything settles down, these deals will go back to the REIT because they have a preference when it comes to the fully conforming real estate deals..

Okay.

Second question on your credit line, just to clarify, did you guys say that you're looking to expand up to additional $35 million on the line?.

Yes, the existing credit facility is an accordion feature going from $65 million to $100 million subject to syndication. And currently, we're broadening our spectrum of options to bring other banks as co-lenders and participants into the facility..

Okay. Thank you..

Our next question comes from Mark Smith with Lake Street. Please go ahead..

Hi guys. Just looking for more of a broad update on the industry. What are you guys seeing day-to-day in the states where you operate? Have you seen some continued market downturn, is bleed over from some of these bigger states? Or do you feel like we're near a bottom? Any thoughts on the industry would be great..

Thank you for that question. This is John Mazarakis. I think the meaningful compression that we see is primarily focused in the Western states, California, Colorado, Oregon and Washington State. Obviously, for some of the medical states out east, we have seen a little bit of a bottoms down.

There has been limited type of growth in states like PA, Michigan surprised us. I think Michigan is a really strong state. Cannabis is performing really well in that state, and it has continuously grown and it's continuing to grow.

Massachusetts also has surprised us even though it has a sort of hybrid environment between an oligopoly in a perfectly competitive market, depending on how you see it, Massachusetts has been performing strongly. Of course, New York is coming online. New Jersey has basically knocked it out of the park.

Everyone knows that, that state has performed extremely well. Delaware was a surprise. We thought that Delaware was going to turn rec. The Senate and the house voted for recreational sales. The Governor, unfortunately, vetoed that bill. And even though they had super majority rights, they decided to join the Governor and Delaware never turned rec.

Other states that are coming online, Ohio issued a few more licenses. We're very excited about Ohio. We think it's going to perform really well long-term. PA has a little bit of compression, but it's a medical state with a ton of upside. I think Florida is a huge success story.

Although I think from a medical perspective, it maybe reaching its peak before recreational sales kick in. I think that's kind of like a broad overview of the way I see the market.

I think the medical states, even if they're kind of reaching a plateau are still looking at an upside of maybe 3x to 5x from a topline perspective and maybe 5x to 10x from a bottom line perspective, once recreational sales kick in. So for the medical states, we're still very excited.

We've seen it time and time again in Illinois, Massachusetts and Michigan, whenever a state moves from medical to rec, the topline and the bottom line have like a serious multiple effect. So that's my perspective on the overall state of the industry..

Perfect.

And then similar, you hit on some certain states, but any thoughts or updates on as you guys look at regulatory environment kind of at the federal level?.

I think there is a possibility that some sort of federal relief may actually surprise us this time. But I've gotten this question wrong so many times. So I don't even want to even try to answer it. There is a lot of talk that something will happen. We're not holding our breath, but it will be beneficial overall. I think we'll lower our cost of capital.

It will bring more capital into the market. I think we've built a phenomenal brand, and we will be the beneficiaries of that growth..

Excellent. Thank you, guys..

Thank you..

Our next question comes from Harrison Vivas with Cowen..

Great. Thanks so much for taking my questions. Kind of wanted to double back on Mark's question, but maybe reframe it in terms of the portfolio. So there's been a little bit of a step-up in the risk rating of your portfolio.

Understanding that might not reflect the fundamental performance of the names, I guess, my question is, what geographies are you incrementally concerned about? And how is that driving your risk evaluation of the portfolio? Thanks..

Lindsay, do you want to take that one?.

Certainly, John.

Yes, I think that's a good point noting that our risk ratings have increased across the portfolio, this isn't related to any specific borrower or any particular issue related to a borrower, but rather is related to general market conditions with interest rates and spreads, I mean, I think John mentioned earlier that kind of a tale of two cities.

There have been two consecutive quarters of negative GDP growth. However, cannabis has grown 30% nationally in the first half of the year, most of that coming from markets transitioning from medical to recreation.

So overall, we think the credit quality of our borrowers is strong in the states that we're in, but we just don't want to ignore what's going on with the broader market within our portfolio..

Okay.

So it's truly just broad, not really specific market-driven, just to confirm?.

That's correct, yes..

Correct..

Okay. Understood. And then, I guess, as we think about New York, it appears that the regulations really aren't going to favor the established MSO's.

So I guess as you evaluate that as a potential opportunity, what are your considerations in terms of the borrower profile? And I guess, how big of an opportunity do you think that state is?.

I think New York will be a huge success. It's a massive state. Everyone is talking about how that might be the biggest state, may even surpass California.

We know that there is a meaningful sizable black market in New York that is operating pretty much in the open, and then to answer your question directly, I think any sort of fragmentation within the state is benefiting us as lenders.

It drives our risk probably – the risk remains the same because New York will be a great market, but the return is significantly higher in the middle market. So any type of fragmentation is benefiting us as credit providers..

Okay. Understood. Last one for me. Tony, you talked about the floating rate portion of the portfolio being around 60%.

I guess, how is that tracking relative to internal targets? And as you execute new loans, obviously, I imagine the focus is executing floating rate loans, but how do you balance your execution between floating and fixed rate?.

Yes. So pretty much everything that we've done for the last few months has been floating and everything that we plan to do in the future will be floating. So if anything, I think that's going to tick up as either new loans are paid off or new loans are paid off and done.

So I think that it's just really of those things that we're much more resolute on the front end. So I think that 60% is kind of a good benchmark, but our plan is to keep increasing that over a longer period of time..

Understood. Thanks very much. I will jump back in the queue..

There are no further questions at this time. This concludes today's earnings call. Thank you for attending. You may now disconnect..