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spk03: Good day and thank you for standing by. Welcome to the Chicago Atlantic Real Estate Finance Incorporated first quarter 2023 earnings call. At this time, participants are only in a listen-only mode. After the speaker's presentation, there will be a Q&A session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. 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.
spk02: Please go ahead. Tripp Sullivan Thank you. Good morning.
spk04: Welcome to the Chicago Atlantic Real Estate Finance Conference call to review the company's results for the first quarter of 2023. On the call today will be John Mazarrakis, Executive Chairman. Tony Kappel, Chief Executive Officer. Andreas Bodmeier, Co-President and Chief Investment Officer. 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 file 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, May 9, 2023, It 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 activity. 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 balance 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 gap measures are included in our filings with the SEC. I'll turn the call over to John Mazarrakis. Please go ahead.
spk06: Thanks, Tripp. Good morning, everyone. With all that's transpired in the financial sector these past months, I believe we've proven out our original thesis from several years ago. That thesis being we could bring a direct lending approach to help institutionalize the cannabis credit market and quickly become the leading capital provider in the space. None of us would have anticipated the shakeout we've seen of late with a large competitor pulling back from the space and other lenders reining in their originations. We've done what you're supposed to do in this type of environment. Create the largest platform that attracts borrowers and lenders alike. Originate your own loans so you know the collateral and the borrowers and have the direct relationship. Maintain access to accretive sources of capital. Make sure your loan portfolio is predominantly floating rate in a rising rate environment. Err on the side of being underlevered instead of overlevered if rates are rising and a recession is likely. Diversify your borrowing base across geography and assets. Focus on the best credit operators in limited licensed states and structure the terms to protect your capital above all else. Before I turn it over to Tony to provide more of the details, I want to address our 2023 guidance. We noted in our earnings release that we affirmed the outlook that we provided with our Q4 results. We reported better than anticipated distributable earnings this quarter due to make-call and prepayment fees from several principal repayments we received during the quarter. As I noted on our last call, we're intentionally holding back on originations to be even more selective than we've been of late and to take advantage of a large number of refinancings among the largest MSOs over the next 12-plus months. Tony, why don't you take it from here?
spk07: Good morning. At March 31st, our loan portfolio had a total loan commitments of $328 million across 24 portfolio companies with a weighted average yield to maturity of 19.4%. Compared with 19.7% at December 31st, and 17.2% a year ago. New originations during the quarter were $34 million, with all but $800,000 funded to new borrowers. We continue to be very disciplined in deploying the REIT's available capital to focus on strong credit operators and fulfill the growth capital needs of existing borrowers. During the quarter, we received principal repayments totaling $58.3 million of which $57.8 million was related to unscheduled early repayments and sales. We received $1 million in prepayment fees and acceleration of original issue discounts from these repayments. Using those proceeds, we paid down the credit facility by $20.5 million. We currently have approximately $53 million of liquidity in the REIT that we can put to work in the coming months. This credit facility remains the primary means for funding our portfolio growth, and we are in active discussions with additional banks to potentially join the facility. All loans are performing. Our portfolio is now 88% floating rate based off the prime rate, which is up from 83% floating rate from the last quarter and 63% from March of 2022. The Federal Reserve raised their target rate again last week, which brought the prime rate to 8.25%. We estimate that our weighted average portfolio yield received 70% to 80% of the benefit from each increase of the prime rate. Our balance sheet also continues to be under levered at 14% of book equity at quarter end compared with 22% at year end. Compared with other commercial mortgage REITs with leverage ratios averaging 200% to 300%, our balance sheet is in great shape. I think it's worth noting as well that our credit facility, with simple debt service and real estate covenants, is different from other mortgage REITs. Our credit facility is not a repo line, where the collateral is mark-to-market on a much more frequent basis. In our case, we have a debt service coverage ratio on a consolidated basis of 7.6 to 1 as of quarter end compared with the requirement of 1.35 to 1. We understand there is a concern that levered commercial mortgage REITs may lose credit availability due to rising interest rates, leading to a decline in real estate collateral value. That's not applicable in our case based on how our credit facility is structured and the nature of our collateral. Lastly, I'd like to address our pipeline. We have an actionable pipeline of 600 million in opportunities. We are taking advantage of this pipeline throughout the Chicago Atlantic platform but we are doing so very selectively. While we might be sacrificing a bit on loan portfolio growth in the near term, we believe the next 12 plus months could be one of the better periods in our industry to put capital to work. I'll turn it over to Phil now to review our financial results.
spk01: Thank you, Tony. Net interest income for the quarter was up nearly 1% compared with Q4 due to the recognition of approximately $1 million of non-recurring income from prepayment fees and acceleration of OID from principal repayments. We also benefited from the impact of the 50 basis point increase in the prime rate in March. These positive impacts were offset by the timing of those early principal repayments. Total operating expenses for the quarter before CECL provision were down 18%, primarily due to the decrease in net management and incentive fees. Arrogant G&A and professional fees increased sequentially by 220,000, primarily attributable to expense reimbursements to our manager. Adjusted distributable earnings was $0.62 per diluted share for Q1 compared with $0.57 in Q4. We distributed a dividend of $0.47 for the first quarter, which resulted in a dividend payout ratio of approximately 76%. The Q1 diluted earnings per share was $0.60 compared with $0.41 in Q4. The increase is primarily due to a lower provision for expected credit losses and lower net management and incentive fees. We increased our quarterly CECL reserve by 96,000 as of March 31st. The CECL determination for the quarter considered reserve reversals attributable to the principal repayments received during the quarter. On a relative size basis, we increased the total reserve to approximately 1.3% of outstanding principal as of Q1 as compared to 1.2% as of December 31st. Approximately 85% of the portfolio based on outstanding principal is fully secured by real estate with 15% having limited or no real estate collateral. Our portfolio on a weighted average basis had real estate collateral coverage of 1.6 times as of March 31st, 2023. Our book value as of March 31st increased to $15.04 per common share compared with $14.86 as of December 31. Operator, we're now ready to take questions.
spk03: Thank you. At this time, we will conduct our Q&A session. As a reminder, to ask a question, you need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
spk02: Please stand by while we compile the Q&A roster. Our first question comes from Aaron Hesch from JMP Securities.
spk03: Go ahead, Aaron.
spk00: Hey guys, thanks for taking my questions. John, how would you describe the business environment for your borrowers today? Obviously there's been pockets of challenges for the industry over the last year or so, but I'm just wondering, is profitability getting incrementally better or worse in general? And then I guess on that note, it sounds like Congress is trying to drum up support for safe banking again, any thoughts on if you think it'll pass?
spk06: Good morning, everyone. Thanks for the question, Aaron. I couldn't agree with you more. There are pockets out there. And I would say there isn't an incremental improvement, but what we've noticed is that there is a plateau. I think prices are stabilizing. CapEx has been very scarce in this space. And we expect them to start taking upwards. I mean, some of the really competitive states out west that we don't invest in have seen meaningful increases in wholesale price in the order of 30% in some cases. So, you know, nothing to write home about when you're going from, you know, 700 to 900. It's nothing great. But still, I think, you know, the fact that California, you know, is kind of seeing a major exodus from existing cultivators in Colorado, Oregon, and Washington is practically starved when it comes to capital. I think it's going to provide an environment for rising prices. Out east, we've seen a plateau. and we're expecting prices to begin to rise. I mean, and I'm excluding Maryland, which is a certainty, obviously. With respect to the SAFE Act, you know, we're not holding our breath, but as we've said before, for Chicago Atlantic, that's a positive event because we have built a very large platform, and we will be the beneficiaries of much-needed leverage in the space.
spk00: Right. Appreciate that. I was looking at page nine of the supplement, and it looks like 44% of your loans are allocated to construction projects. And just wanted to get some color on how you underwrite construction versus, you know, providing mortgages on assets that are already in place. and do a lot of the borrowers that are doing construction loans, do they run in negative corporate level cash flows for a period of time, or do you mandate that they need to have corporate coverage before they can start construction?
spk06: Thank you for the question. So we haven't really funded a construction loan in over 14 months. And what, you know, we obviously have a construction department led by our expert, Michael Izingue, who has built, you know, millions of square feet of retail and industrial space in the Midwest. We currently don't have any borrowers that have, you know, purely construction projects other than expansions. Of existing operations, and to answer your question directly, we don't have any Pre revenue loans and we haven't funded any loans for over 14 months.
spk00: Great thanks for taking my question.
spk02: You're welcome. Our next question comes from Mark Smith from Lake Street. Mark, please go ahead.
spk05: Hi, guys. First question for me, just want to clarify and make sure I understand things right. When you guys talk about kind of reigning in originations here, and kind of your thought process of why. It sounds like it's not as much kind of risk profile today or capital preservation, but it's more so that you see some more opportunities coming out up over the next 12 months. Am I thinking about that right, or walk us through kind of why you would rein in a little bit right now?
spk06: I didn't hear you clearly on the first part of the question, but I think, yes, the second part, we definitely are focused on the top 10 MSOs, and we think opportunities will be coming in the next 12 months or so. With respect to the pipeline, I think the pipeline is robust, but we won't blink. We'll kill a loan if we have to. We're not in desperate need to deploy capital. So we've been extremely selective. and we've killed a couple of deals as they were maturing in the process, but before funding. So that's the update.
spk05: Okay. And then any thoughts around shifting back to some fixed rate loans if the Fed's done? Do you guys have any appetite for that today?
spk06: I think the best you know, case scenario for us is to remain floating, but actually increase our, um, uh, our floor, our interest floors, all our loans have a, have a floor. So we've been, you know, increasing those floors.
spk05: Okay. Perfect. And I think the last one for me, um, You know, any update on kind of your outlook on prepayments or anything that's coming up here over the next few months?
spk01: Hey, thanks, Mark. No, I think with the prepayments that occurred in Q1, there was really no consistent theme across what was paid down, paid off, you know, sold during the quarter. And, you know, as we've discussed a little bit, we haven't seen a change in the availability of sources yet. of institutional capital for operators with no movement imminently in SAFE. But with the early repayments being able to occur for a variety of reasons, we don't have any guidance toward that for the remainder of the year.
spk05: Okay. Maybe I'll sneak in one more, just big picture thoughts here. Can you walk us through, if we were to see SAFE Act passed, how that would change your outlook and how you guys operate the business. Would you get more aggressive? Walk us through any changes that would make on your business.
spk06: Yeah, we would probably be a little more aggressive. I think we would be the beneficiaries of cheaper capital, primarily coming from the debt side of the equation. And being the largest, I think we will have access to those deals. Now, the capital, I think, will be cheaper, But I think also the rates are going to be somewhat more in line with mainstream industries that kind of reflect the positioning of cannabis in the broader US economy. So not the cheapest, but still there will be like a cannabis premium due to the fact that this would be still a taboo industry. I think the net-net benefit to investors will be somewhere along the lines of where it is today because of those two counteracting sort of forces.
spk05: Okay. Great. Thank you.
spk03: I would now like to turn it back to John Mazarakis for closing remarks.
spk06: Thank you all for joining us this morning. We're available for follow-up questions if anyone needs to ask any other questions. Thank you. Thank you for participation in today's conference. This does conclude the program.
spk03: You may now disconnect.
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