Chicago Atlantic Real Estate Finance, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The company is an externally managed commercial mortgage REIT focused primarily on senior loans to state-licensed cannabis businesses, secured by real estate and, where permitted, other borrower assets. Results are unaudited.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $16.5 million | $9.8 million in Q1 2022 |
| Net interest income | $14.9 million | $9.8 million in Q1 2022 |
| Net income | $10.7 million; $0.60 per diluted share | $7.8 million; $0.44 per diluted share in Q1 2022 |
| Adjusted distributable earnings (non-GAAP) | $11.1 million; $0.62 per weighted-average share | $8.0 million; $0.46 basic and $0.45 diluted per share in Q1 2022 |
| Cash and total assets | $4.6 million cash; $322.9 million assets | $5.7 million cash; $343.3 million assets at December 31, 2022 |
| Loans held for investment, net of CECL reserve | $312.2 million | $335.3 million at December 31, 2022 |
| Revolving debt | $37.5 million outstanding; $55.0 million available | $58.0 million outstanding at December 31, 2022 |
| Stockholders’ equity / book value per share | $272.1 million / approximately $15.04 | $264.0 million / approximately $14.86 at December 31, 2022 |
| Quarterly dividend | $0.47 per share, declared; paid April 14 | $0.40 per share in Q1 2022 |
- Operating cash flow was $1.7 million, versus $3.0 million in Q1 2022. Investing activities provided $25.3 million, mainly reflecting loan repayments and loan-sale proceeds, net of new fundings. Financing activities used $28.1 million, including $13.5 million of dividends paid and net revolver repayments.
- The loan portfolio’s reported weighted-average yield-to-maturity IRR was 19.4%, compared with 19.7% at year-end 2022. This is a management estimate incorporating fees and other assumptions, not a realized yield.
- The CECL reserve for outstanding loans was $4.1 million; the total reserve, including unfunded commitments, was $4.1 million. The allowance increased partly in response to weaker internal risk ratings associated with macroeconomic conditions and higher rates.
Material changes versus the prior comparable period
- Interest income rose 68.1% and net interest income rose 52.7% year over year. Management attributed the increase mainly to higher Prime Rate levels and the floating-rate share of the portfolio; Prime Rate was 8.00% at March 31, 2023 versus 3.50% a year earlier.
- Net income increased 37.0%. Total expenses rose to $4.2 million from $2.0 million, led by higher management and incentive fees and general and administrative expenses.
- The portfolio comprised 24 loans at March 31, versus 22 at year-end 2022. Outstanding principal was $320.2 million, down from $343.0 million, as repayments and a loan sale more than offset new fundings. Approximately $34.1 million of new loan principal was funded during the quarter.
- Floating-rate loans represented approximately 88.0% of the portfolio, up from 83.1% at year-end 2022. Management estimates a 100-basis-point Prime Rate move would change annual loan interest income by approximately $2.7 million and annual revolver interest expense by approximately $0.4 million, before other effects.
- The company issued 395,779 shares in a registered direct offering in February, raising approximately $6.0 million net. Its revolving facility’s maturity was extended to December 16, 2024.
Outlook, commentary, risks and unusual items
- Outlook and liquidity: Management intends to grow the loan portfolio and expects to use loan repayments and sales, as well as additional equity and/or debt financing, to support growth. It believes cash, revolver availability and operating cash flows will meet operating requirements for at least the next 12 months. No numerical earnings or dividend guidance was provided; management cautioned that the Q1 dividend does not indicate future dividend capacity.
- Credit and collateral: No loans were on non-accrual at quarter-end, but four loans had principal or interest more than 30 days past due. The filing says risk ratings declined amid rising rates and macroeconomic pressures, although loans continued to perform as expected. Approximately 80% of the portfolio had underlying real estate fair value above loan balances; the remaining portion relied in part on other collateral. The reported fair value of the loan portfolio was $307.3 million, below its carrying value before the credit reserve.
- Interest-rate risk: Floating-rate assets can benefit from rising rates, but borrowing costs may rise faster than asset yields; rate caps, floors and mismatches could compress spreads or reduce cash available for distributions. All floating-rate loans had floors, and one was subject to a rate cap.
- Industry and legal risk: Cannabis remains illegal under U.S. federal law. Changes in state laws, enforcement, licensing or borrower conditions could impair operations and collateral recovery. The company may be unable to take possession of cannabis-related collateral directly, potentially complicating enforcement and increasing loss severity.
- Funding and distributions: The company is subject to REIT distribution requirements and may need to use working capital, financing or asset sales if cash available is insufficient. It must also maintain revolver covenants; management reported compliance at quarter-end.
- Related-party activity: The company is externally managed and incurred $2.1 million of management and incentive fees in Q1. A loan sale of approximately $13.7 million and a purchase and subsequent sale of a loan of approximately $19.0 million involved affiliates under common control with the Manager; the Audit Committee approved the transactions, which were reported at prices approximating carrying value plus accrued interest.
- Other disclosures: The filing reports no material pending legal proceedings, no income tax expense, and no material changes in internal control over financial reporting. The revolving facility was extended during the quarter.
Important facts for investors to verify
- Confirm loan repayment, delinquency and borrower performance trends, especially for the four loans more than 30 days past due, and monitor subsequent changes to risk ratings and the CECL reserve.
- Assess whether the estimated collateral values and the company’s ability to enforce security interests are robust, given cannabis-related legal restrictions and the reported portfolio fair-value discount.
- Check that liquidity, revolver availability, covenant compliance and refinancing capacity remain adequate as the facility approaches its December 2024 maturity and the company funds undrawn commitments.
- Evaluate whether cash interest collections support the dividend: Q1 adjusted distributable earnings were $0.62 per weighted-average share versus a $0.47 dividend, but earnings include non-cash PIK interest and other adjustments.
- Reconcile share-count disclosures: the March 31 balance sheet reports 18,088,683 shares issued and outstanding, while the statement of equity reports 18,162,298 shares at quarter-end. The filing text does not explain this difference clearly.
- Review related-party loan transactions and fee arrangements, including the approval process, allocation of investment opportunities, and the effect of origination-fee offsets on management fees.