Chicago Atlantic Real Estate Finance, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. 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.
Financial results and position
| Metric | Q3 2023 | Nine months 2023 |
|---|---|---|
| Interest income | $15.2 million | $46.4 million |
| Interest expense | $1.4 million | $4.1 million |
| Net interest income | $13.7 million | $42.3 million |
| Net income | $10.0 million | $29.3 million |
| Diluted EPS | $0.54 | $1.60 |
| Adjusted distributable earnings per diluted share | $0.57 | $1.74 |
- Compared with 2022, Q3 interest income rose 10%, net interest income 6%, and net income 2%. For the nine months, interest income increased 31%, net interest income 24%, and net income 17%. Management attributed higher interest income mainly to rising Prime rates and a larger floating-rate share; higher borrowing costs and operating expenses tempered profit growth.
- Cash from operating activities was $12.9 million for the nine months, versus $12.4 million a year earlier. Investing activities provided $8.8 million, compared with $120.7 million used in 2022; financing activities used $18.7 million, versus $37.4 million provided. Cash and cash equivalents ended the period at $8.7 million.
- At September 30, total assets were $352.3 million, liabilities $76.5 million, and stockholders’ equity $275.8 million. The loan portfolio had $341.8 million in principal outstanding and $333.7 million net carrying value after a $5.1 million expected-credit-loss reserve.
- Revolving-facility borrowings were $63.0 million against a $100.0 million commitment, leaving $37.0 million available. The company reported compliance with facility covenants. Subsequent to quarter-end, borrowings increased to $74.0 million, with $26.0 million available as of November 8.
- The company declared $0.47 per share for Q3, paid October 13; dividends declared for the first nine months totaled $1.41 per share. Book value per share was approximately $15.17, versus $14.86 at December 31, 2022.
Portfolio, changes and significant items
- The portfolio comprised 27 borrowers, compared with 22 at year-end 2022. Aggregate commitments were $355.9 million, including $11.2 million undrawn. Floating-rate loans represented 81.1% of the portfolio; weighted-average estimated yield-to-maturity IRR was 19.3%, down from 19.7% at year-end. These are portfolio estimates, not realized returns.
- One $16.3 million loan was placed on non-accrual May 1 after covenant breaches and missed payments; an acceleration notice followed in June. The related-party administrative agent acquired pledged subsidiary interests at a public auction on August 10 and intends to sell assets for lenders. The loan remained more than 90 days past due at quarter-end, with a reserve of approximately $1.3 million; no Q3 interest income was recognized on it.
- The total credit-loss reserve rose from $3.9 million at year-end 2022 to $5.1 million for outstanding loans, plus $0.1 million for unfunded commitments. Management cited borrower-specific credit changes and rate-related pressure on borrowers, while noting improved comparable-company valuation multiples supported the Q3 reserve estimate. Changes in assumptions could materially affect future reserves.
- Paid-in-kind interest was $6.3 million for the nine months, included in income but not received in cash during the period. The company also purchased $3.4 million of corporate bonds, valued at $3.5 million at quarter-end, and recorded a $0.1 million unrealized gain.
- Management said available cash, revolver capacity, and operating cash flows should meet requirements for at least the next 12 months. It expects portfolio growth to require additional equity and/or debt financing and anticipates recycling capital from repayments and loan sales. No specific earnings or dividend guidance was provided; management cautioned that the Q3 dividend does not assure future dividends.
Risks and investor verification points
- Credit and collateral: Verify the recovery and asset-sale progress for the non-accrual loan, the adequacy of its reserve, and subsequent changes in delinquency, risk ratings, and total expected-credit-loss reserves. Approximately 74% of the portfolio was fully collateralized by real estate; the balance also relied on other collateral.
- Rate sensitivity: Management estimated that a 100-basis-point Prime increase would add about $2.8 million to annual cash interest income and about $0.6 million to annual revolver interest expense, before other effects. Floating-rate asset caps, floors, payment terms, and funding costs can alter the net impact.
- Cannabis-related legal and recovery risk: Cannabis remains illegal under U.S. federal law. Changes to state laws, licensing, enforcement, or the ability to take possession of cannabis-related collateral could impair borrower performance or recoveries.
- Funding, distributions, and concentration: Check revolver availability, covenant compliance, financing needs, and dividend coverage as the portfolio grows. The top three borrowers represented 29.7% of principal outstanding; the largest represented 11.2%.
- Related-party oversight and expense growth: The Manager and affiliates manage operations, receive management and incentive fees, and participate in loan transactions. Nine-month management and incentive fees increased 70% year over year; review related-party transactions and expense reimbursements.
- Reporting and outlook: Confirm subsequent portfolio and financing developments and future cash conversion of income, particularly PIK interest. The filing reports effective disclosure controls and no material change in internal control over financial reporting; it identifies no material pending legal proceedings.