Chicago Atlantic Real Estate Finance, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. The company is an externally managed commercial mortgage REIT focused primarily on senior loans to state-licensed cannabis businesses, generally secured by real estate and other borrower assets.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 / prior period |
|---|---|---|
| Interest income | $15.34 million | $16.53 million |
| Interest expense | $2.10 million | $1.62 million |
| Net interest income | $13.24 million | $14.91 million |
| Net income | $8.73 million | $10.69 million |
| Basic / diluted EPS | $0.48 / $0.47 | $0.60 / $0.60 |
| Distributable earnings (non-GAAP) | $9.74 million; $0.53 basic and $0.52 diluted per share | $11.09 million; $0.62 per share |
| Operating cash flow | $6.92 million | $1.70 million |
| Cash and cash equivalents | $6.90 million | $7.90 million at Dec. 31, 2023 |
| Loans, net of CECL reserve | $370.49 million | $348.67 million at Dec. 31, 2023 |
| Revolving loan balance | $81.25 million | $66.00 million at Dec. 31, 2023 |
| Stockholders’ equity / book value per share | $285.96 million / $14.97 | $271.85 million / $14.94 at Dec. 31, 2023 |
Net cash used in investing was $18.72 million, principally reflecting $22.4 million of loan fundings, partly offset by $3.7 million of principal repayments. Financing provided $10.81 million, including revolving-loan activity and stock issuance; cash declined by $0.99 million during the quarter. The company declared a $0.47-per-share dividend, paid April 15, 2024.
Material changes and portfolio
- Compared with Q1 2023, net interest income fell 11% and net income fell 18%. Interest income declined 7%; interest expense rose 30%, reflecting the higher average revolving-loan balance. Diluted EPS decreased from $0.60 to $0.47.
- The portfolio had 28 borrowers, $377.6 million of principal outstanding and $401.3 million of aggregate commitments at quarter-end. The company funded approximately $22.4 million of new principal during the quarter; weighted-average remaining life was 2.0 years and reported weighted-average YTM IRR was 19.4%.
- Floating-rate loans represented approximately 76.6% of the portfolio, down from 80.5% at year-end. The CECL reserve increased to $5.36 million from $4.97 million; the quarter’s provision was $380,000 versus $96,000 a year earlier.
- One $16.5 million related-party loan remained on non-accrual, more than 90 days past due, with an approximately $1.3 million CECL reserve. Its collateral interests were acquired by the administrative agent at auction, which intends to sell assets for the lenders. A second loan placed on non-accrual in late 2023 was restored to accrual in March 2024.
- Approximately 65.7% of the portfolio had real estate collateral valued above loan balances; the filing reports top-three borrowers at 27.1% of principal outstanding. Approximately 59.5% of loans were rated in the two lowest-risk categories, while 44.7 million of carrying value was risk-rated 4; none was rated 5.
Liquidity, outlook and risks
- In February 2024, the revolving facility’s maturity was extended to June 30, 2026, and its accordion capacity expanded to permit commitments up to $150 million. At March 31, $18.7 million remained available; $160.2 million of loans at principal were pledged as collateral. The company reported compliance with facility covenants.
- Management expects cash on hand, available facility capacity and operating cash flows to meet requirements for at least the next 12 months. It expects portfolio growth may require additional equity or debt financing and capital recycling. The filing provides no specific earnings or dividend guidance.
- Management identifies cannabis-related legal and regulatory uncertainty, borrower credit and collateral recovery, elevated interest rates and inflation, refinancing risk, and dependence on financing availability as material risks. Cannabis remains federally illegal; the company may be restricted from taking possession of cannabis assets after a default.
- A 100-basis-point Prime Rate move was estimated to change annual cash interest income by approximately $2.9 million and annual cash interest expense by approximately $0.8 million, before specified exclusions. Rate changes, loan caps and floors, and asset-liability mismatches could affect margins and cash flows.
- Several loans had maturity or covenant amendments, including extensions after quarter-end. The management agreement automatically renewed on April 30, 2024. Management said disclosure controls were effective; a new integrated ERP system was implemented during the quarter.
Investor verification priorities
- Track collections, collateral realization and reserve adequacy for the non-accrual related-party loan, including the outcome of the agent’s asset-sale process.
- Review borrower maturity extensions, payment performance and the company’s risk-rating and CECL assumptions, which depend partly on estimated borrower and collateral values.
- Verify liquidity and refinancing capacity as facility borrowings rise, including borrowing-base availability, covenant compliance and any future equity issuance or dilution.
- Assess whether cash earnings and taxable income support the $0.47 quarterly dividend; distributable earnings are non-GAAP and include specified non-cash adjustments.
- Monitor cannabis legal and regulatory developments, interest-rate exposure, portfolio concentration and related-party management and lending arrangements.