Chicago Atlantic Real Estate Finance, Inc. Price & Performance (REFI)

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. 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 Peter Sack. Please go ahead. Thank you, Tripp. Good morning, everyone. I'd like to open this call with a brief discussion of industry developments, accomplishments in Q4 and our outlook as we begin the year. US cannabis industry turns the year on muted notes. The failure of Florida's adult use ballot initiative lack of prioritization of federal cannabis reform and pricing pressure in some markets have contributed to cannabis equity values and implied valuation multiples reaching near record lows. [indiscernible] Against this backdrop, Chicago Atlantic executed a tremendous fourth quarter. Results underscore the continued success of a strategy that places credit and collateral first add value to our borrowers collaboratively, and is driven by a leading team of industry experts originators and underwriters.

We aim to create a differentiated and low levered risk return profile is insulated from cannabis equity volatility and outperforms our industry agnostic mortgage REIT peers. Two data points which underscore these achievements now more than four years since inception. November 4, 2024, the eve of the November election, to 03/06/2025, REIT stock price increased from $15.13 to $16.15 per share or 6.7%. And we announced two dividends, while MSOS the ETF which generally tracks U. S. Cannabis operators declined by 61%. The second and perhaps more important metric analysis suggests that benchmarks since inception on a total return basis assuming dividend reinvestment refi is the number three top performing exchange listed mortgage REIT. We aim to be number one Amid industry and economic uncertainty, we focus on deploying capital with consumer and product focused operators in limited license jurisdictions, at low leverage profiles and supporting fundamentally sound growth initiatives. [indiscernible] We deployed $90,700,000 in gross originations in Q4, nine investments spanning Ohio, Nevada, Illinois, Florida, Pennsylvania, Missouri, and Minnesota among others. Diversification remains strong across 30 portfolio companies. During the year, increased our senior secured credit facility to $110,000,000 and closed on a $50,000,000 unsecured term loan at attractive pricing of which we deployed nearly half net of repayments in the fourth quarter.

We delivered $2.06 per share in dividends to our shareholders in 2024. The cannabis pipeline across the Chicago Atlantic platform now stands at a $490,000,000 and we have current liquidity of approximately $67,000,000 to fund deployment. Before I pass the mic to David Kite, my fellow Managing Partner and Chief Operating Officer, I'd like to highlight a significant achievement for which he is primarily responsible.

Q1 twenty twenty five, the administrative agent completed key milestones in the foreclosure on select operating assets of loan number nine. Which has been on non accrual for some time. Members of the administrative agent were successfully affiliated with Pennsylvania Department of Health as principals giving them full operational control of the assets and we hope that through operational and balance sheet restructuring, we may restore this loan to accrual status this year. Defaults, workouts and restructurings are inevitable byproduct of Directland. Despite a low default rate, we have considerable expertise and we hope to show definitively in 2025 that we can execute for the benefit of our shareholders. David, thank you for the effort. And why don't you take it from here? Thank you, Peter. Appreciate the kind words but it definitely was a team effort that allowed us to successfully As of December 31, our loan portfolio principal totaled $410,000,000 across 30 portfolio companies with a weighted average yield to maturity of 17.2%. That's down from 18.3% at September 30, due primarily to the 50 basis point decrease in the prime rate across our floating rate portfolio and the originations Peter mentioned earlier whose yields were modestly below our historical averages.

Gross origination during the quarter were $90,700,000 of principal funding of which 52,600,000.0 and $38,100,000 funded to new borrowers and existing borrowers, respectively.

At year end 2023, approximately 24% of our loan portfolio based on outstanding principal was insulated from the risks of declining interest rate.

Which we define as comprised of fixed rate loans and floating rate loans with floors greater than or equal to the prevailing prime rate. As of 12/31/2024, this percentage had increased to nearly 68% The other 32% of the portfolio that remains floating is not exposed to interest rate caps at current rate level. Similar to our outlook last quarter, there is still uncertainty surrounding tax policy the economy tariffs, inflation, and the direction that the Federal Reserve will take on interest rates. We believe we have made the right decisions of interest rate declines and benefit should interest rates rise by adjusting the mix of floating and fixed rate loans and negotiating higher floors. Total leverage equaled 34% of book equity at year end compared with 24% at 12/31/2023. Our debt service coverage ratio on a consolidated basis for the year ended 12/31/2024 was approximately 5.5 to one compared with a requirement of 1.35. To one. As of December 31, we had $55,000,000 outstanding on our senior secured credit facility and had fully drawn down 50,000,000 on our unsecured term loan. As of today, we have $38,500,000 outstanding on the senior credit facility and $71,500,000 of available borrowing capacity.

I'll now turn it over to Phil.

Thanks, David. Our net interest income of $14,100,000 for the fourth quarter represented a 2.7% decrease from $14,500,000 during the third quarter. The decrease was partially attributable to the 50 basis point decrease in the prime rate during the three months ended 12/31/2024, as well as the timing of deployment of the proceeds from our unsecured notes, which closed in October 2024. For the year ended 12/31/2024, we recognized gross interest income from non recurring prepayment and make whole fees exit fees and structuring fees of $3,200,000 compared to $3,500,000 during the prior year ended 12/31/2023. Interest expense for the fourth quarter increased by approximately $400,000 The increase was driven by the interest expense on our newly closed unsecured term notes which bear interest at a fixed rate of 9%. The fill balance of the notes was advanced at closing and the proceeds were used to temporarily repay borrowings on our revolving loan. Accordingly, from $76,400,000 during the third quarter. This partially offset the increase in interest expense from the unsecured notes. Total operating expenses excluding management incentive fees and the provision for credit losses increased quarter over quarter by approximately 250,000 attributable to expense reimbursements to our manager. Our base management and incentive fees for fiscal year twenty twenty four eight point one million dollars compared to $8,800,000 in the prior year.

Driven by the change in core earnings as defined in our management agreement. Our CECL reserve as of 12/31/2024 was approximately $4,300,000 compared with $4,100,000 and $5,000,000 as of September 30, and 12/31/2023, respectively. On a relative size basis, our reserve for expected credit losses represents 1% of outstanding principal of our loans held for investment. Our portfolio on a weighted average basis had real estate coverage of 1.1 times as of December 31, [indiscernible] loans are secured by various forms of other collateral in addition to real estate, which contribute to overall credit quality. On a risk rating basis, credit quality has remained strong. Approximately 91% of the portfolio at carrying value is risk rated three or better as of 12/31/2024, compared to 8988% as of September 30, 12/31/2023 respectively. Loan number nine remains the only loan in our portfolio on non accrual status and is included in risk rating four carrying a reserve for credit losses of approximately $1,200,000 During 2024, we raised approximately $38,400,000 of net proceeds from issuances of common stock through our ATM program. The weighted average selling price net of commissions of $15.63 represents a premium to our December 31 book value of approximately 5.4 Distributable earnings per weighted average share on a basic and fully diluted basis was approximately $0.47 and $0.46 for the fourth quarter and $2.08 and $2.03 for fiscal year.

In January, we distributed the regular fourth quarter dividend of $0.47 per common share as well as a special dividend of $0.18 per common share relating to undistributed taxable income for tax year 2024. Both of which were declared by our Board in December. For fiscal year 2024, we paid total dividends of $2.06 amounting to a payout ratio of approximately 99% of our basic distributable earnings of $2.08 Our book value was $14.83 and $14.94 per common share as of 12/31/2024, and 2023, respectively. The decrease in book value is primarily attributable to dividend paid in excess of our GAAP net income. On a fully diluted basis, there were approximately 21,200,000 common shares outstanding as of 12/31/2024. Lastly, I'd like to highlight the guidance we shared for 2025. [indiscernible] Similar to last year, we are expecting to maintain a dividend payout ratio based on our basic distributable earnings per share of 90% to 100% for the year.

If our taxable income requires additional distributions in excess of the regular quarterly dividend in order to meet our taxable income distribution requirement, would expect to meet that through a special distribution in Q4 twenty twenty five. Operator, we're now ready to take questions.

Thank you. We will now begin the question and answer session. And the first question will come from Chris Van Love with Piper Sandler. Please go ahead.

Thank you and good morning everyone.

First, can you talk about demand for loans and leverage expectations Got a good amount of activity in the fourth quarter on the origination [indiscernible] but still remains pretty low But given the $500,000,000 pipeline or nearly $500,000,000 pipeline pipeline, would you expect to take leverage up further in the near term?

To fund loans or utilize the ATM and just how is demand overall from the borrowing landscape? I'd say on on market demand, in a a compressed equity valuation profile of demand has changed. But from the type of projects and the type of initiatives [indiscernible] that were being funded four years ago.

But I think that's been offset. The change of that profile has been not more than offset. By just the maturation of the industry and this year's much larger size of the industry. Today than there was than it was four years ago. We don't expect to increase leverage the near term beyond that which is already approved under our senior secured facility. And its accordion feature.

Thank you for that. And then just an update on credit quality.

How it's performing, your expectations? You mentioned you have just the one loan on nonaccrual, but environment here does remain uncertain. So curious on your thoughts on credit and health of your borrowers currently? And then just digging a little deeper into loan number nine, over the near term, what's the goal there? Is it a sale? And just curious what you're to do with that asset?

Overall credit quality hasn't changed significantly. Quarter over quarter. And I think that's reflected in the risk rating figures where you certainly have movement between our buckets of risk rating figures every quarter. As one would expect. Overall, not a significant change in in posture?

I'll let David speak to the loan number nine and progress there.

Sure.

So while we have taken operational control of the assets and the operations there, There had been a cease and desist order on the dispensaries and the cultivation. We're currently working diligently to remedy all of the deficiencies and remove the cease and desist order, which we expect to be done soon. We'll get the dispensaries up and operational as well as the cultivation creating value for the assets. And then at that point, we'll decide what to do. Okay, great. And then just one last question for me. Can you share your latest thoughts on scheduling your views there? I believe you said last quarter you would expect to occur in 2025, but just curious on any update Thank you.

I think we're I think the whole industry is looking for greater data points out of the Trump administration. On where their posture leans And unfortunately, every day that goes by without those data points and those indications should push back one's expectations for when real progress occurs. So we our posture is to invest as always to invest assuming a catalyst such as rescheduling never occurs. And that's going to continue to be our posture until there's greater certainty otherwise. Much greater certainty otherwise.

Okay.

Well, thank you all for taking my questions. Appreciate it.

The next question will come from Pablo Schoenich with Schoenich and Associates. Please go ahead. Thank you. Good morning, everyone.

Look, my question regarding industry context has to do with the way most companies are dealing with 280E. Right? As you know, taken a more aggressive stance. They are letting the long term liabilities or uncertain tax benefits increase on the balance sheet But on the other hand, and they are provisioning as normal corporations, right? So their cash flows are improving they seem to be in much better shape in that sense. I'm trying to think from your perspective, yes, they have more cash and they are probably able to serve their debt better, But on the other hand, they have this increasing debt with IRS, right? So So how do you think about that? Is this good from your perspective or negative or is just a neutral factor? Thank you.

Think it's an unavoidable factor. We consider unpaid tax liabilities to be a form of indebtedness. And it's a strong factor in our underwriting process and how we view the leverage profile of our borrowers. We factored in and control this risk by aiming to create limitations on the amount of unpaid tax liabilities that may be accrued on the balance sheet over the course of our loan.

And we do that through requirements that taxes be paid and and or through leverage covenants or SCCR covenants that factor in that tax liability.

Okay. That's helpful. Thank you. And then just a follow-up When we try to think in terms of the shape of the industry, versus the shape of the companies, I could make the argument that, yes, there's more deflation out there There's revenue per store erosion, particularly in some states like Illinois, because there's more licenses being issued. And those are both negative for the industry On the other hand, the companies seem to be focusing more on cash flow, on cutting costs, improving profitability, I'm just trying to think from your perspective when you put all that together, is the industry you're looking at, the borrowers you're looking at on average, in better shape or worse shape than before?

It's a challenging question because we don't have to invest in the industry as a whole. We invest in individual operators. And we're certainly seeing the ability to find strong operators with strong growth projections that are still under levered. And so so long as we can maintain a sufficient pipeline to deploy our capital in accretive, very accretive transactions. What's happening in one or another state doesn't necessarily impact us if we're still finding really attractive, accretive opportunities. So it's a simple question to answer in a general manner.

All right. Thank you. And just two more quickly. So you have $67,000,000 left of liquidity. I understand you don't give guidance but should we assume that that would be probably fully utilized in 2025? In terms of deployment?

We aim to be fully deployed. With with sufficient liquidity buffer.

All right. And last one, if you can just provide an update on New York. I mean, that's been a good program for you, but and there's obviously more stores opening. So I'm sure there's more demand for that facility. If you can provide any color on that. Thank you. That's it.

We've been extremely encouraged by progress that New York regulators and New York operators have made in the last year of of opening stores, of cracking down on illegal operators, and processors and cultivators creating a portfolio creating stronger portfolios of products that consumers want that combats the black market.

This falls back on what we think are some of the key key key factors that lead to a successful market and and allow a legal market to out compete an illegal market. And that's access to dispensaries in close proximity, That's a strong product portfolio. Of products that are better than what's available in the illicit market and available more consistently.

And and crackdowns on illegal operators. I think that's the least important of the three.

We've been extremely encouraged.

That's great. Thank you.

The next question will come from Chris Mueller with Citizens Capital Markets. Please go ahead.

Hey, guys. Thanks for taking the questions. I'm on for Aaron today.

So I guess picking up on a prior question, the chance of the schedule III or other type of reform looking bleak in the near term, would you say that your borrowers are generally able to operate in the status quo? And does any type of reform factor into your underwriting?

Yes, the first question. And to the second question, it's the answer is no. We underwrite assuming that [indiscernible] rescheduling does not occur? Because it's simply difficult to difficult to project. And that's been the case of our approach to investing in this industry from the get go. That we underwrite assuming that significant state based market reforms or federal reforms do not occur.

And when they do occur, that's a positive catalyst for our operators and for ourselves. And we think that's the appropriate stance to take when making responsible debt investments.

And that's been the absolutely correct stance for the last couple of years. So I applaud you guys on that. I guess my other question is on the dividend. So can you talk about how the Board thinks about increasing the base dividend versus paying the special? This is the third year in a row that you guys have paid the special. I'm just curious on the thought process there.

We want our investors to view to view this to be the regular dividend as having significant cushion to performance? And we evaluate our dividend decisions every quarter and have a discussion surrounding it. But we ultimately want us want our investors to view the regular dividend as having a strong margin of safety.

Got it. Very helpful. Thanks for taking the question.

And our next question comes from Aaron Grey with Alliance Global Partners. Hi, good morning. Thanks for the question.

We just want to circle back on the pipeline.

I believe you alluded to how the profile has changed a bit, so close to 500. Just wanted to talk a little bit around that. So is it maybe a little bit less now in terms of expansion of existing you guys have in the deck? A little bit more of a reference to M and A can you talk about maybe how that profile has changed? And is it still primarily focused around single state operators potentially looking more at multi state operators? So just any color in terms of some of the commentary you provided that would be helpful. Thank you.

I think we are we're leveraging our originations team we think is the largest in the industry. That focuses on building relationships in the markets that were most attractive most excited about. Building those relationships over the time span of months and years. Such that when that operator is pursuing a growth initiative, and has a capital need, were their first call. And particularly in the fourth quarter, that's that's our originations has been driven by idiosyncratic growth projects, idiosyncratic growth initiatives M and A, M and A opportunities, individual projects that I think difficult to categorize within a specific market trend or a specific market market [indiscernible] with the exception perhaps of Ohio. Who's transitioned to adult use and execution of the sensory construction, we continue to support Okay, great. Thank you for that color there. And then a second one for me. Obviously just in terms of broader industry dynamics. A lot of people are talking about the debt maturities coming in 2026. So just want to have more broadly, is that potentially present any opportunities for you to come in as one of the options in some type of refinancing? And just more broadly, how you're thinking about some of the loans in your portfolio that could be coming to maturity?

This year? Thank you.

We aim to be lender of choice. And to add value to our existing borrowers and to borrowers that we'd like to work with in the future. So that when maturities arise, we can be the relationship of choice and be a lead in those transactions. And so we would love to support the industry as those maturities come due.

That being said, I think the [indiscernible] with in catastrophic terms that it doesn't really merit? I think that a maturity doesn't mean that the existing lenders necessarily don't want to be a part of a new loan facility.

There could be repricings. There could be changes of loan terms. But I don't but that doesn't necessarily mean that capital is leading the industry. And has to be replaced by someone. And so I do think the market will work through much of these much of these loan maturities. In normal course? And we would love to be a part of that.

That's helpful color there. I'll jump back in the queue. Thank you.

With no further questions, this concludes our question and answer session. I would like to turn the conference back over to Peter Sack for any closing remarks.

Thank you for taking the time and to our investors thank you for the support. Look forward to reporting on Q1 shortly. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. [indiscernible] [indiscernible]