Chicago Atlantic BDC, Inc.

Good day, and thank you for standing by. Welcome to the Chicago Atlantic BDC Inc. Q3 2024 earnings 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 the session, you will need to press star 11 on your telephone. You will then hear an automated message advising 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 turn the conference over to Trip Sullivan of Investor Relations. Please go ahead.

Thank you. Good morning. Welcome to the Chicago Atlantic BDC conference call to review the company's results. On the call today will be Scott Gordon, Executive Chairman and Co-Chief Investment Officer. Andreas Bodmeier, Chief Executive Officer. Humesh Mahajan, Co-Chief Investment Officer and Chief Financial Officer. and Dino Colonna, president. Our results were released last night in our earnings press release, which can be found in the best relations section of our website, along with our supplemental earnings presentation filed with the SEC. A live audio webcast of this call is being made available today. 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. Before we begin, I would like to remind everyone that certain statements that are not based on historical facts made during this call, including any statements related to financial guidance, may be deemed forward-looking statements under federal securities laws because these forward-looking statements involve known and unknown risk and uncertainties that are important factors that could cause actual results to occur materially from those expressed or implied by these forward-looking statements. We encourage you to refer to our most recent SEC filing for information on some of these risk factors. Chicago Atlantic BDC assumes no obligation or responsibility to update any forward-looking statement. Please note that the information reported on this call speaks only as of today, November 8, 2024. Therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay or transcript reading. I'll now turn the call over to Scott Gordon. Please go ahead.

Thanks, Tripp. Good morning, everyone. A little over a month ago, we closed on the acquisition of a loan portfolio from Chicago Atlantic, renamed the company to Chicago Atlantic BDC, Inc., and began a new chapter in our history with the ticker symbol of LEAN. This was a long journey that we've updated you on throughout the year, and I'm pleased that we're now seeing the fruits of that hard work. Lean came together as a joint venture between Chicago Atlantic and Silver Spike, combining two leading investment platforms in the cannabis industry. And more importantly, Lean is the only publicly traded BDC focused on lending to cannabis companies with net assets of over $300 million in investments in 28 portfolio companies. I am proud to be leading a great management team comprised of talent from both companies. We believe our BDC gives investors access to a differentiated source of credit alpha from what is typically found in other BDCs or private credit funds. By doing this, we increase the prospects for further growth within our core activity of providing capital to high-quality operators within grossly underserved sectors. In addition to our proven experience in cannabis lending, there are several reasons why we're confident in growing the non-cannabis lending vertical. The three biggest reasons are we have the right team with relevant origination and underwriting experience to succeed in non-cannabis investing. Chicago Atlantic has a track record in non-cannabis lending with a strong return profile and consistent growth in the portfolio. And lastly, Chicago Atlantic has a pipeline of self-originated deals in non-cannabis through its distinctive referral network. Since we began trading under our new name and ticker on October 2nd, Lean has been well received by investors. This is what we were hoping for when Silver Spike and Chicago Atlantic began talks. We saw an accretive opportunity from which all shareholders and team members can benefit. We shared synergistic goals, and we are excited to collaborate, innovate, and drive collective results for the benefit of our shareholders. This week's election has certainly been front and center in everyone's mind, and none more so than in the cannabis industry. As we've talked about all year, federal rescheduling is likely a next year type of event. The Trump campaign had been generally supportive of rescheduling, so we don't see too many hurdles to that ultimately occurring. Question will be the timing. Safer banking is going to take some time as well. With the gridlock Congress, the timeline is likely pushed out even further than it was pre-election. We have never underwritten our loans on the basis of rescheduling. Safer banking, or any other legislative or regulatory relief taking place in the immediate future. We underwrite on the current market as it exists today at the federal level and on each individual state regulatory scheme. Now, I'll hand it over to Andreas. Thanks, Scott.

Chicago Atlantic BDC has a differentiated and unique approach to targeting potential investments in under-followed sectors which we believe is a durable long-term strategy that has the potential to deliver attractive risk-adjusted returns with low correlation to our peers in the BDC space. We are a very different BDC. We're the only BDC focused on and able to lend to cannabis companies. We're also going to other places where the more traditional BDC lenders don't go, and we're seeing idiosyncratic opportunities that aren't available in other BDCs or private funds. We will remain focused on the cannabis industry as we're bullish on the prospects for the industry to continue growing in a dynamic fashion. Being among one of the fastest growing sectors in the market brings a lot of opportunity for growth. We're in the early innings of the evolution of this industry that will continue to have further regulatory progress and catalysts. Whether that's more states coming online for more medical and adult use. Federal legalization would be transformational, but that's certainly hard to predict. We sit in a very privileged position as one of the biggest dedicated capital providers to the industry. We enjoy great relationships with many of the biggest operators in the space. We will continue to support them with capital and advice in the true spirit of a BDC partnership. We don't see ourselves as merely a lender. We like to help our borrowers think about their own success and how to get there. There's a real focus in understanding their challenges and helping them drive profitable growth. As the newest member of the Chicago Atlantic BDC team, I thought I might make some brief comments on the broader Chicago Atlantic platform and why we're excited about the potential of our two companies coming together for this opportunity in both cannabis and non-cannabis lending. Since our founding in 2019, Chicago Atlantic has continued to invest in growing our infrastructure. We now have offices in Chicago, Miami, and New York, and we have assembled a top-notch team of over 30 investment professionals. We have one of the largest cannabis lending platforms, our own originations team, our own real estate diligence and development team, decades of experience in direct lending, a diversified loan portfolio, and now two publicly traded vehicles. The strength and size of our platform, not to mention our operational, financial, legal, and underwriting expertise, has led to many exciting partnerships. As one of the largest and most experienced investment platforms in the industry, for continually developing innovative approaches to support the industry's growth. We will also not sacrifice the platform we have created at Chicago Atlantic to pursue short-term or short-sighted growth. We do everything within our power to execute on the tremendous investment potential in cannabis in a manner that protects principal investment while maximizing potential long-term returns. Umesh, why don't you take it from here?

Good morning. Thanks, Andreas. Before I begin my brief comments, I want to highlight our updated investor presentation that we filed last night. We've added some new disclosures to that presentation and intend to continue to expand our quarterly presentation more in the mode of an earnings supplemental going forward. So turning to our highlights for the third quarter. Gross investment income for the quarter was 3.2 million compared to 2.9 million in the third quarter last year. Excluding the costs specifically related to the loan portfolio acquisition, expenses were $731,000 compared to $1.3 million a year ago. Investment income excluding these transaction expenses was $2.4 million, or $0.39 per share, compared with $1.6 million, or $0.26 per share, a year ago. Transaction-related expenses totaled $2.4 million this quarter and have been the primary factor in the decline of our reported net investment income this year in 2024, we anticipate that we'll have some additional expenses incurred in the fourth quarter, but nothing of the magnitude we have experienced today. Reported net investment income for the quarter was $15,000, or nearly zero cents per share for the quarter. And net assets were 82.5 million at the end of the quarter, and the net asset value per share was $13.28. So you'll notice in our new quarterly investor deck that we have provided a pro forma summary of the investment portfolio as of October 1st to reflect the addition of the loan portfolio acquisition that we did. These investments were listed in detail in our most recent 10Q, which was filed last night, But I wanted to highlight some of the important distinctions between our portfolio as of September 30 and as of October 1. The investment portfolio is not only five times larger in size, but also significantly more diversified. We now have 28 portfolio companies. Over 23% of our portfolio is invested outside of cannabis across multiple sectors. And our average position size is about 3% compared to a more concentrated portfolio earlier. And over 79% of our portfolio is floating rate loans. And 99% of those loans have a rate floor, which shields us from declining interest rates. More importantly, our expanded portfolio retains some of the attractive characteristics that we've had previously. Average yield on the portfolio is approximately 17.2%. The weighted average secured net leverage for our portfolio companies is 1.6 times, and none of our loans is in non-equal status. The greater size of this portfolio will make our previous periods less comparable in terms of net assets, investment income, and expenses going forward. But I would also note that we have issued an additional 16.6 million shares of common stock at net asset value as of September 28th in conjunction with the loan portfolio acquisition. There are approximately 22.8 million shares of the company's common stock outstanding today. Further, at the BDC level, we have no debt. So as our BDC takes on leverage and deploys that capital to expand our investment portfolio, we are positioned to improve the returns for the benefit of our shareholders. We'll be providing an update on the dividend for this quarter through a separate announcement later this month after receiving the necessary approval from our board of directors. We expect our quarterly dividend per share to be higher than our prior dividend per share. I'll now turn it over to Dino to talk about our origination efforts.

Thanks, Dimesh. We made two debt investments during the quarter. The first was with an existing borrower, Workbox Holdings. for an incremental $0.3 million. The second was to Ascend Wellness for $3.5 million. We are pleased to deepen our commitment to Workbox and to initiate a new relationship with Ascend, as they are both well positioned for future growth in their respective industries. Subsequent to quarter end, we funded approximately $5.5 million in net investments, which included the funding of three investments offset by one repayment of an existing loan. The current pipeline across the Chicago Atlantic platform is robust, with approximately $559 million in potential debt transactions across 39 unique companies. This pipeline is comprised of a diverse set of companies across cannabis and non-cannabis, all with what we believe are attractive risk-reward characteristics. This unique and diverse set of opportunities is a direct result of the hard work and expertise of the Origination team across the Chicago Atlantic platform. a team I'm proud to be a part of and see great future with. The company had previously been limited in its ability to execute on our pipeline due to being subscale. But now, with a significantly larger and more diversified portfolio, a healthy cash position, and better prospects for leverage, we are well positioned to capture more of the pipeline and put available liquidity to work over the next few quarters. As mentioned earlier, We are now also engaged in activity outside of cannabis and are finding unique opportunities to provide credit in other sectors where traditional capital sources aren't focused. Effective October 1st, non-cannabis investments represented approximately 23% of our portfolio, so it's worth highlighting where we currently see opportunities outside of cannabis. While there are many qualities in common to how we approach cannabis and non-cannabis investing, such as low debt to enterprise or asset value, as well as strong covenants, collateral coverage, and cash flow, the non-cannabis opportunities can be classified into three sub-strategies. The first is growth capital and technology, where we're focused on industry leaders and destructive companies that are experiencing strong growth trajectories and typically need capital to support continued revenue growth or expansion of the overall business. The second is esoteric and asset-based lending. We're focused on established companies with strong cash flow profiles in industries that carry idiosyncratic risks, which limit access to traditional sources of capital. The last is liquidity solutions, which is typically focused on event-driven opportunities, including, but not limited to, mergers, acquisitions, refinancing, dividend recaps, or other strategically driven liquidity needs to establish businesses. While we remain largely focused on the cannabis industry, the opportunities outside of cannabis are also very compelling. Whether cannabis or not, we are excited to continue creating customized financing solutions tailored to the unique needs of borrowers while maintaining a rigorous approach to underwriting and structure. We look forward to reporting back on our progress and continuing to build a portfolio over the next several quarters. Operator, we're now ready to take questions.

Certainly, 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. Our first question today will be coming from Pablo Zuanek of Zuanek & Associates. Your line is open, Pablo.

Thank you. Good morning. Look, the first question, can you just try to quantify How much liquidity do you have to put to work? I mean, you talked about no debt, so you can add leverage, and also there's cash in the balance sheet. Just remind us of your, you know, what is tolerable in terms of our leverage targets and the cash in the balance sheet. Just trying to think in terms of that pipeline you talked about, how much you can put, how much cash, how much you have, how much ability you have to put to work here. Thanks.

Yeah. Hi, Pablo. This is Omesh. In terms of our liquidity, at the time when we closed the transaction, we had about $30 million. We currently have a little over $30 million in cash balance on our balance sheet. But you're right, we do have a very concerted effort to add leverage to the balance sheet. If you think about our equity of over $300 million, and if you look at typical BDCs, we have a substantial amount of capacity to add debt. Even if we assume that we take a third of the turn of equity as our leverage, that would give us about $100 million. So it's a little early to talk about exactly how much we will have on our balance sheet from the leverage facility, but those conversations are currently in progress, and we will have an update for you on our next call.

Okay, thank you. And then just to be clear for people out there, when you talk about that $550 million plus pipeline, that's a group pipeline, right? So just remind us, how do you decide how much of that goes to, I don't know, to refi, the REIT? How much does go to Lien, the BDC? How are those decisions made? Thank you.

Yes. So, yes, you're right. The pipeline is across the group. And we track all kinds of investments here across real estate, non-real estate, across cannabis, non-cannabis. But a couple of things I would point out. This pipeline is a very robust pipeline. So it's not just a pipeline which could be – There's a lot more thought that has gone into identifying the opportunities that are somehow more real and actionable. And so we feel good about that number across the platform. And then in terms of allocating across the different entities, it really is a function of what is best suited for which entity. And of course, following the regulations that require us to allocate in a certain manner according to the 1940 Act. But in terms of the allocation at a simplistic level, there are certain opportunities that are clearly suited better for certain entities within the platform. Real estate opportunities are probably better suited for the REIT. BDC, as you know, can invest in real estate or non-real estate, but we do not have the opportunity to invest in opportunities which have an equity linked upside or equity linked feature in it, especially in the cannabis sector. We can do the non-cannabis sector investments with attached equity features or upside features to it. So there are a whole host of considerations that go into the allocation, but we feel good about the fact that we now have the ability to provide solutions to of borrowers across sectors, but definitely in the cannabis sector, we have the ability to provide a different range of structuring solutions and provide the capital for the right borrowers and the right operators. Does that answer your question, Pablo?

Yeah, no, that's good color. If I may, just a couple of follow-ups here. So, okay, 23-way portfolio, it's outside cannabis. I understand the advantages of having a diversified portfolio across sectors, and you explain what type of sectors. And I'm not going to draw comparisons, right, but we saw the case of AFC Gamma, a very different company, right? They tried to go into commercial real estate, and according to them, the investor feedback was that they wanted something focused on cannabis. I'm assuming in your view, the investor feedback you've gotten is that there is value to having this diversified portfolio as opposed to being 100% in cannabis. If you can just expand on that. Thank you.

Yes, definitely. And I will pass it on to Dino, who talked about the different strategies. But at a higher level, yes, we definitely feel that there is a strong case to have a diversified portfolio to be able to provide a portfolio which has Not just across, by diversified, I mean not just across sectors, but also across the kind of market-related factors that can keep the portfolio robust under different scenarios. And that can really be achieved well if we have a little bit of exposure to the non-campus section as well. And just to point out, the... I'm not at this point thinking that we're going to make a major shift away from cannabis. Cannabis will continue to be our core. And we are just adding non-cannabis at a level where we think it's an optimal mix to have the right kind of diversification. But, you know, you want to jump in and talk a little bit more about the non-cannabis strategy here?

Yeah. Thanks, Rish. Just quickly, what I would say is, you know, diversification is great. and we're excited to have a bit more diversification in the portfolio. But I don't think we'd be doing this if we were giving up or looking at less attractive opportunities. The non-cannabis part of the book, from a relative risk-reward perspective, is just as interesting as cannabis. So I think both from a diversification perspective, but also the returns we're getting and the risks we're taking are comparable. So it just felt like a really natural fit for the extension outside of cannabis.

Thank you. And one last one. I mean, obviously, you talked at length on the regulatory environment, you know, the political changes. I'm not going to get into that here. But what would be your read at the moment in terms of the state of the industry, particularly when we look at some of the results we've seen during the third quarter season? Are things pretty much in line with your expectations? I mean, if you can just comment on that. Thank you.

Yeah, I think from the perspective of what we are seeing across the various markets, because we can't look at cannabis as a one monolithic market across the country. We have to look at it from a state-by-state basis. I think if we take a longer-term view, yes, things are progressing well across all of the markets, notwithstanding certain certain specific events that we might have seen, for example, in Florida or New York, there are bumps in the road. But overall, the long-term thesis, the secular growth thesis still holds strong across the sector. And in terms of what these operators are doing across each state, I think we are now seeing the better operators surface to the top. And that is exactly what we focus on as lenders. We are looking for operators who have navigated through all of these events well, have a better strategy for not only managing their costs effectively, but also position themselves well for the growth. And there's the question. We have seen growth strategies, both organic as well as M&A, across different markets being manifest in different forms. And we are able to evaluate those strategies and choose the companies that have the right credit metrics. Overall, we feel that the sector is performing the way we would on a longer-term basis. There is clearly a need for capital and we think we are best positioned to provide that capital. Scott, do you have any additional comments on the overall state?

Yeah, no. I mean, I would just say, as we mentioned in the call, Pablo, you know, as far as regulatory changes, we've always been sort of hopeful yet skeptical that any of those would prevail. You know, I think the sell-off that we've seen in the market is a result of, you know, the combination of Florida getting rejected and what the market might think sort of a Republican regime means for progress on the federal front. It doesn't really – it truly doesn't matter to us. It's not in our models. I think it's business as usual for us, which is – You know, a market that's clearly growing, that, you know, continues to maintain momentum of reform, regulatory reform, and legislative progress at the state level. A murky and impossible trajectory to predict in terms of federal change, other than, you know, perhaps 280E and rescheduling. And all of that's sort of fine for us. You know, we've always felt that, you know, you know, the growth is there and the complexity and underwriting and being a good lender to the space is challenging. And I think the backdrop of, you know, how we operate as a lender remains the same. You know, we can pick and choose among a very selective subset of operators in the space that qualify for being good credits for our business. And we think, you know, that's unchanged in this environment, despite, you know, what's been sort of a tough quarter for some of the public operators and, you know, what's kind of like a volatile, maybe macro perspective currently. So I think we're undeterred by all of that and it's business as usual.

Thank you. If I may, I will add one more, if I may. So obviously the demand supply imbalance for capital in the industry remains, and with a drop in share prices, raising equity will probably be even more difficult. So I suppose that's good for the debt providers, right? But I mean, correct me if I'm wrong, but at the same time, in terms of the demand for debt capital, But at the same time, comment on the competitive landscape, right? We saw relief, I think, refinance with a regional bank at like 7.9% rate. They said 7.99. You know, are we seeing more competition from that side of the business, or is that still very limited? That's all. Thank you.

I think... Go ahead.

You go ahead, Omar.

You start. I was just going to say that, yes, the... We have seen some of those banks stepping in in a few specific instances over the last year. But overall, Pablo, even if you, again, look at the overall market and the demand for the capital that exists across all of the country, the demand is very, very robust, and the suppliers of capital are very few, as you know. And it's not as if we've seen a rush of capital increase. come into the lender space and it's not as if there is a massive amount of liquidity available to support the demand that exists. But Scott, sorry, please go ahead.

Yeah, no, I was just actually going to say the same thing that, look, I think, you know, capital coming into the space is good for everyone and it's good for us. But I think that if you take a step back and focus out the inherent imbalance of the demand for capital relative to the limited sources of supply that drive our business in terms of being able to dictate really attractive terms with respect to pricing and structure, it's still there. So I think the nuclear winter of there being very little capital available on the credit side that we saw maybe 12 or 18 months ago is falling a bit, which is good. But I would still generally characterize the setup as being one of a pretty significant imbalance still, despite on the margin some new sources of capital coming in on the banking side and elsewhere.

Thank you very much. And Dan, do you want to weigh in from Chicago Atlantic perspective on the same topic?

I think what we're seeing is from the bank world, the interest and the deals that are getting executed come with very high deposit balances. So lending to cannabis businesses by banks appears to be used to a large extent to gather deposits, which for many operators is not a good solution.

Right. Thank you.

And there appears to be no further questions. I'd now like to turn it back to Scott Gordon for closing remarks.

Great. Well, thanks, everybody, for joining. Appreciate your time this morning, and we look forward to staying in touch with you. Take care.

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