Chicago Atlantic Sees Decline In Income, But Reaffirms 2023 Outlook

August 9, 2023 · Green Market Report

Chicago Atlantic Real Estate Finance, Inc. (NASDAQ: REFI) announced its financial results for the second quarter ended June 30, 2023. The commercial mortgage real estate investment trust reported that its net interest income fell 8.3% sequentially to approximately $13.7 million. However, this was an increase over last year’s net income of $11.8 million for the same time period. The company attributed the drop to the impact of the timing of early principal repayments and the lower average principal outstanding during the quarter.

Chicago Atlantic also noted that the decrease reflected the impact of one loan placed on non-accrual status during the quarter which represented approximately $0.6 million of the total decrease. On a positive note, the declines were partially offset by approximately $0.6 million of interest income from prepayment fees and acceleration of original issue discounts, and a decrease in the weighted average borrowings on the revolving credit facility.

The company was also able to trim total expenses to approximately $3.9 million before provision for current expected credit losses, representing a sequential decrease of 5.8%. Chicago Atantic said the expense reduction was helped by a $0.3 million decrease in net management and incentive fees.

CEO Tony Cappell said, “With an ongoing shakeout within the industry of both capital providers and less-experienced cannabis operators, we continue to benefit from our past decisions to focus primarily on vertically integrated operators and limited license states. The loan portfolio is well-positioned with the percentage of floating rate loans at 88%, real estate collateral coverage of 1.5x, a loan-to-enterprise value of 41% and a weighted average yield to maturity at 19.2%. With leverage of 16% at quarter end and over $46 million of current liquidity, we have the flexibility to pursue continued growth in the portfolio.”

Dividend Solid

Despite that, Chicago Atlantic reaffirmed its outlook for 2023. That outlook stated that the regular quarterly common dividend is expected to be a minimum of $0.47 per weighted average diluted share. The company also stated that if its net income requires additional dividends over and above the regular quarterly dividend amount to meet its 2023 taxable income distribution requirements, the company would meet that requirement with a special dividend in the fourth quarter of 2023.

On July 14, 2023, Chicago Atlantic paid a regular quarterly cash dividend of $0.47 per share of common stock for the second quarter of 2023 to common stockholders of record on June 30, 2023.

Current Portfolio

At the end of the quarter, the company had total loan commitments of approximately $329.2 million ($315.6 million funded, $13.6 million in future fundings) across 25 portfolio investments.

The top three states in the portfolio are Maryland, Michigan, and Florida in that order respectively. These three states represent 55% of the portfolio. The top three borrowers represent approximately 31.8% and 29.4% of principal outstanding and approximately 29.7% and 27.9% of the total commitments, respectively.

During the second quarter, Chicago Atlantic had total gross originations of $1.9 million, all of which were funded to existing borrowers. New originations were more than offset by principal repayments of $6.9 million, of which $5.0 million was attributable to unscheduled early repayments.

John Mazarakis, Executive Chairman of Chicago Atlantic, noted, “Our capital structure is among the best in the mortgage REIT sector and the strongest in the cannabis space. We have no shortage of demand for capital from strong credit operators, and that demand is reflected in our pipeline. As planned, we intentionally held back on our loan originations pace during the quarter to remain highly selective on new investments. In doing so, we have been able to take advantage of a new program with the State of New York that offers the opportunity within the REIT to fund up to $50 million in long-term financing at an attractive rate.”

The company said in its filing that other than the one loan placed on non-accrual status, the loans continued to perform as expected. “For approximately 74% of the portfolio, the fair value of the underlying real estate collateral exceeded the amounts outstanding under the loans as of June 30, 2023. The remaining approximately 26% of the portfolio, while not fully collateralized by real estate, may be partially collateralized by real estate and was secured by other forms of collateral including equipment, receivables, licenses and/or other assets of the borrowers to the extent permitted by applicable laws and regulations governing such borrowers.”

New York

The company’s high-profile status in New York was cemented in June 2023 when New York Governor Kathy Hochul announced that Chicago Atlantic would invest up to $150 million across its platform in the New York State Cannabis Social Equity Investment Fund.  The REIT’s funding is subject to the identification and due diligence of appropriate dispensary locations, a process to which Chicago Atlantic’s in-house real estate team has lent its considerable expertise.

The company has not released what its rates are for New York, but it generally starts with the prime rate and then adds an applicable margin. According to the company’s filing, New York’s internal rate of return (IRR)  is set to be 16.3%. While this looks high, it’s dwarfed by the IRR for Michigan that comes in at a whopping 27%. (Full Story)

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