Good day, and thank you for standing by. Welcome to the Chicago Atlantic Real Estate Finance, Inc. Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Tripp 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 third quarter of 2023.

On the call today will be John Mazarakis, Executive Chairman; Tony Cappell, Chief Executive Officer; Andreas Bodmeier, Co-President and Chief Investment Officer; Peter Sack, Co-President; and Phil Silverman, Interim 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, November 8, 2023 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.

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..

each investment decision we make must provide our investors with an attractive yield and protection of principal. We've proven to be good stewards of our investors' capital and you can expect more of that stewardship as we navigate these opportunities ahead of us. I will now turn it over to Peter..

Thank you, John. I'd like to first provide a quick update on our partnership with New York and New York's Cannabis Social Equity Investment Fund. During the quarter, we funded approximately $19 million of the REIT's $50 million commitment to the Social Equity Investment Fund.

While there is ongoing litigation in New York surrounding licensing that has slowed deployment of the fund, we remain committed to supporting this initiative and CAURD licensees across the state and we're highly confident in the credit profile of our fundings to-date.

We are exploring social equity initiatives in other states, but it's too early to report anything on that front. We bring an unmatched scale in the industry and expertise across real estate, operational, financial, legal and credit underwriting to make these initiatives actionable.

As we've noted before, we continue to focus our originations in core markets of interest while remaining very disciplined on our underwriting. You can expect that we will continue to take a lead in markets with strong moats and with operators who excel in the fundamentals.

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

Good morning. From a credit perspective, our portfolio has experienced a meaningful improvement in the last 60 to 90 days. With equity values responding positively to the potential rescheduling news, that's a clear positive from a risk premium perspective and improves our position as equity values have increased.

If 280E goes away, then the operator profitability and free cash flow should improve materially and multiples will expand, which is the type of event that usually attracts more equity capital.

At September 30th, our loan portfolio had total loan commitments of $356 million across 27 portfolio companies with a weighted average yield to maturity of 19.3%, compared with 19.2% at June 30th and 18.3% a year ago. Our weighted average loan-to-enterprise value remained attractive at 42.5%, compared with 41% at June 30th.

Based on the strong start to the quarter, which we disclosed on the last call, total gross originations increased $35 million, approximately $33 million of which was funded to new borrowers. That was partially offset by $11 million of principal repayments, $9 million of which was related to unscheduled early repayments.

Our portfolio was 81% floating rate based off the prime rate, which is down from 88% last quarter and up from approximately 60% in September of 2022.

The slight decrease in floating rate loans was due to three new loans originated in the quarter, which have fixed coupon, the largest of which was the loan to New York Social Equity Cannabis Investment Fund.

Even with these new originations, we continue to see a positive impact on portfolio yield each time the Federal Reserve raises their target rate and the prime rate increases. I'll now turn it over to Andreas..

As disclosed last quarter, we moved loan number 9, which was approximately $16.3 million of principal outstanding to nonaccrual. We noted then that we were in the process of exercising our rights and remedies to pursue full repayment of outstanding obligations and that this course of action was borrower-specific.

As of September 30th, the loan remains on nonaccrual. However, the administrative agent has foreclosed on the membership interest of the borrower and is in the process of obtaining bids to sell the assets in satisfaction of the loan. We believe those bids will be in excess of our carrying value on the balance sheet.

On the capital structure side, we had $63 million outstanding on the revolving credit facility as of September 30. Subsequent to quarter end, we drew another $11 million on the line. That leaves us a total of $25 million in liquidity, net of estimated liabilities.

As noted in our press release, we are reinitiating discussions with our lending group to extend the line to fund additional investment opportunities. We have the ability to extend the facility up to $125 million via the existing accordion feature and believe this will be a more efficient means of funding growth in the portfolio.

Our balance sheet remains at low leverage of 23% of book equity at quarter end, compared with 22% at year-end. Our debt service coverage ratio on a consolidated basis was 7.2 to 1 as of quarter-end compared with the requirement of 1.35 to 1. Ultimately, we would like to approach leverage equal to 100% of our book equity.

The near-term realistic target is closer to 50% of book equity. Either targets would remain far below that of other mortgage REITs and imply substantial growth in the portfolio over the next few years. We intend to get there in a very measured fashion, while also providing a compelling yield to our investors.

I'll now turn it over to Phil to review our financial results. .

Thank you. Net interest income for the three months ended September 30th remained consistent with prior quarter at approximately $13.7 million.

Gross interest income increased approximately $0.5 million, driven by the positive impact of the 25 basis point increase in the prime rate in July and the yield generated on new Q3 fundings of nearly $35 million. The portfolio remains well diversified with loans to 27 borrowers as of September 30th.

In the third quarter, we recognized approximately $0.7 million in non-recurring interest income from early principal repayments, as compared to $0.6 million during the second quarter. These increases were offset by the incremental interest expense on the $20 million in net borrowings on our revolving credit facility during the quarter.

Total operating expenses before the provision for credit losses were consistent with the second quarter. The $0.2 million decrease in management and incentive fees were offset by a corresponding increase in stock-based compensation expense.

Adjusted distributable earnings was $0.57 per weighted average diluted share for Q3, compared with $0.55 during Q2. We distributed a dividend of $0.47 for the third quarter, which resulted in a dividend payout ratio of approximately 83%. Year-to-date, we have distributed approximately 80% of taxable income.

Q3 earnings per weighted average diluted common share was $0.54, compared to $0.47 in Q2. Our quarterly CECL reserve remained consistent with prior quarter at approximately $5.2 million as of September 30th and June 30th.

The reserve determination for the quarter considered reversals attributable to the principal payments received during Q3, which included the full repayment of loan number 15 and was offset by new reserves on third quarter originations.

Credit quality of the portfolio remained stable with 88% of the portfolio risk rated three or better as of September 30th, compared to 87% as of June 30th. On a relative size basis, our reserve for expected credit losses represents 1.5% of outstanding principal as of September 30th, as compared to 1.6% as of June 30th.

Approximately 74% of the portfolio based on outstanding principal is fully secured by real estate collateral. 23% is partially secured with the remaining 3% having no real estate collateral. Our portfolio on a weighted average basis had real estate coverage of 1.5x as of September 30th, 2023.

Our book value as of September 30th increased to $15.17 per common share, compared with $15.06 as of June 30th. Lastly, I would note that based on our results through the first nine months of the year, we affirm our previously issued 2023 outlook. Operator, we're now ready to take questions..

[Operator Instructions] And we'll take our first question from Crispin Love of Piper Sandler. Your line is open. .

Thanks and good morning, everyone. Appreciate taking my questions. First off, so you talked about the credit worthiness of your operations improving just given the potential for changes in scheduling and also regulatory relief.

But with this improvement in credit, do you think that yields with new borrowers could decrease even if there isn't a big pickup in competition over the near term?.

Thank you for the question, Crispin. This is John. We haven't observed anything that points to compression of interest basically, yield. So we expect actual yields to remain where they are..

Okay. Great. Helpful. And then, just on Loan number 9, which is a non-accrual. It sounded like in your comments that you expect that loan to be resolved with a sale.

Do you have any more color there or timing that you would maybe expect a sale for that loan?.

It's for a workout or for the foreclosure process. I think it's been a pretty fast process given the fact that there is no capability of declaring bankruptcy. We feel that the bids will ultimately be in excess of our carrying value. And that's all I have for now. We're hoping to resolve it very soon..

Great. Good news there. And then, just one last one for me. Just on the dividend, it seems like that you're on track to pay a special dividend in the fourth quarter. I'm just curious if that still stands with the target of distributing 90% to 100% of net income through dividends..

We expect to distribute above 90%, yes..

Great. That’s all I have for questions. .

Thank you, Crispin. .

[Operator Instructions] And we'll go to Mark Smith of Lake Street. Your line is open. .

Hi, guys.

Just curious if you have any updated thoughts on Ohio or other new states? And maybe any call-out for states that are moving on pace? Or well, or any other new states that maybe are taking a little longer to get up and running?.

Yes, I think yesterday was a monumental day, because Ohio is a traditionally conservative market. So seeing that 56%, 57% has been very encouraging. We sort of expected it. But it's one thing to expect it and another to actually have it on the ballot so, and then passing. I think Florida looks good. We'll see, we'll see what happens.

I don't have a crystal ball. So, we just have to wait..

Has there been any significant moves in build-out or need for capital in some of the states that have been have more recently moved either revrec or for medical?.

Absolutely. Those are the states that we see most of the movement. Like I mentioned, Maryland, Ohio, was sort of expected. So there was some movement there and then, Missouri..

Okay.

And then, similarly, as you look broadly at the industry, in particular in states where you are today, are you seeing any regions or areas that have become more troubling? Or do you feel like we've kind of bottomed out across the board?.

I think we've pretty much bottomed out. And you see some positive momentum in actually the Western states surprisingly. Some of those numbers from a price perspective, at least wholesale price perspective, are taking on a year-over-year basis positively.

So, yeah, definitely, when you strip all capital from an industry and that industry is very CapEx-intensive. It is not surprising that prices have plateaued from a wholesale perspective. So that's a positive development..

Okay. And the last one for me. Just if you can discuss any more in depth kind of some shift to more fixed rate loans this quarter. Do you see more of that as we move forward? Any additional thoughts would be great..

No, I think it was just random. Yes, we saw it as well. I think it just happened. We don't expect to move to a fixed rate structure. Having said that, we do have floors. So a fixed rate in an environment where rates may start coming down is not the worst position to be in..

Okay. Great. Thank you. .

Thank you. .

And there appears to be no additional questions. I'll turn it back to John Mazarakis for any closing remarks..

Thank you all for joining us this morning. We're available for follow-up questions. Thanks again. Thank you..

This concludes today's conference call. Thank you for participating. You may now disconnect..