Chicago Atlantic Real Estate Finance Inc (REFI) 2025 Q3 法說會逐字稿

Good day and welcome to the Chicago Atlantic Real Estate Finance Inc. 3rd quarter 2025 earnings call.

Today all participants will be in a listen-only mode. Should you need assistance during today's call, please signal for a conference specialist by pressing the star key followed by 0.

After today's presentation there will be an opportunity to ask questions. To ask a question you may press, then 1 on your telephone keypad to withdraw your question, please press star, then 2. Please note that today's event is being recorded. I would now like to turn the conference over to Trip Sullivan of Investor Relations. Please go ahead.

Thank you. Good morning. Welcome to the Chicago Atlantic Real Estate Finance conference call to review the company's results. On the call today will be Peter Sack, co-Chief Executive Officer, David Kite, Chief Operating Officer, and Phil Silverman, Chief Financial Officer.

Our results were released this morning in our earnings press release, which can be found in the best relations section of our website, along with our supplemental filed with the SEC.

A live audio webcast of this call is being made available today. For those who listen to the replay of this webcast, we remind you that the remarks made here and as of today and will not be updated subsequent to this call. During this call, certain comments and statements we make may be deemed forward-looking statements within the meaning prescribed by the securities laws, including statements related to the future performance of our portfolio, our pipeline of potential loans, and other investments, future dividends, and financing activities.

All forward-looking statements represent Chicago Atlantic's judgment as of the date of this conference call and are subject to risk 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, Trip. Good morning, everyone.

This quarter against the backdrop of a volatile private credit environment, we demonstrate another consistent period of execution and performance.

The benefits of our consistent approach and discipline focus on principal protection yielded a strong quarter, and this quarter's gross originations have us on pace to hit our goal of net growth in the loan portfolio.

Challenges in private credit markets have created newfound concern in the investor community.

Declining interest rates impacted lenders with floating rate portfolios. The syndicated loan market experienced high profile fails of fraud.

And excess capital in the market underlies the perceived lack of underwriting standards.

I suspect that these broader concerns have caused us to trade at a sizable discount to our book value rather than the premium we long enjoyed since our IPO nearly 4 years ago.

Noting this disconnect from the reality of our portfolio, our management team and board of directors recently purchased shares on the open market, bringing our collective ownership of the common stock to nearly 1.8 million shares on a fully diluted basis.

There are several reasons why we're so confident with what we've created at Chicago Atlantic.

The first is that we have a cannabis pipeline that currently stands at approximately 441 million.

We believe that this pipeline of opportunities is unrivaled in the industry and is diversified across growth investments, maturities in the market, M&A activity related to operational and balance sheet restructurings, and potential ESOP sale transactions.

Secondly, we have the most robust platform and capital to meet the growth of the industry. We deploy capital with consumer and product-focused operators in limited license jurisdictions at low leverage profiles to support fundamentally sound growth initiatives.

I can't think of a better example of our commitment to the industry than Chicago Atlantic's funding this quarter of what we believe to be the largest real estate-backed revolving credit facility among US operators in the history of the industry, a $75 million 3-year secured revolver with Verona.

Lastly, we've constructed a portfolio with differentiated and low levered risk return profile that is insulated from both cannabis equity and interest rate volatility.

As David will break down for you in a moment, because we have structured our floating loans with interest rate floors, only approximately 14% of our total loan portfolio is exposed to any further rate declines based on today's 7% prime rate.

That discipline provides a meaningful measure of protection to the portfolio.

We are focused on outperforming and delivering the kind of returns that we all expect to shareholders. Confidence in the strategy is important, and hopefully I've provided some insight into why we are enthusiastic and why we as a management team executed share repurchases in recent weeks.

But execution on our plan matters even more, and I look forward to reporting on our continued progress over the balance of the year.

David, why don't you take it from here?

Thank you, Peter. As of September 30th, our loan portfolio principal totaled approximately $400 million across 26 portfolio companies with a weighted average yield to maturity of 16.5% compared with 16.8% for the second quarter.

Gross originations during the quarter were 39.5 million of principal fundings, of which 11 million was advanced to a new borrower and 20 million was related to the new Verano credit facility that Peter mentioned earlier.

These were offset by unscheduled principal repayments of $62.7 million that we disclosed last quarter.

As of September 30, 2025, our portfolio consisted of 36.7% fixed rate loans and 63.3% floating rate loans.

The floating rate portion is primarily benchmarked to the prime rate. Following last week's 25 basis point rate reduction, bringing the prime rate to 7%, only 14% of our portfolio remains exposed to further rate decline. The remaining 86% is either fixed rate or protected by primate floors of 7% or higher. Importantly, our floating rate loans are not exposed to interest rate caps. This structural advantage combined with our rate floor protections. Positions our portfolio favorably compared to most mortgage rates. Should the Federal Reserve implement another adjustment to the Fed funds target, in December, we are well insulated against the adverse effects of declining interest rates.

Total leverage equaled 33% of book equity at September 30 compared with 39% as of June 30.

As of September 30, we had 52.4 million outstanding on our senior secured revolving credit facility and 49.3 million outstanding on our unsecured term loan.

As of today, we have approximately 69.1 million available on the senior credit facility and total liquidity, that of estimated liabilities of approximately $63 million.

I'll now turn it over to Phil.

Thanks David. Our net interest income of $13.7 million for the third quarter represented a 5.1% decrease from 14.4 million during the second quarter of 2025. The decrease was primarily attributable to non-recurring prepayment, make whole, exit and structuring fees, which amounted to 1.1 million for Q3 2025 compared with $1.5 million in Q2 2025. Additionally, approximately 0.1 million of the decrease in net interest income was attributed to the impact of the 25 basis point rate cut late in September on our floating rate portfolio and interest expense on our revolving credit facility.

Total interest expense, including non-cash amortization of financing costs for the third quarter, was approximately $1.6 million down from $2.1 million in the second quarter.

The weighted average borrowings on our revolving loan decreased $14 million compared to 42.3 million during the second quarter.

Our Cil reserve on our loans held for investment as of September 30th, 2025 was approximately $5 million compared with 4.4 million as of June 30th.

On a relative size basis, our reserve for expected credit losses represents approximately 1.25% of our outstanding principal of our loans held for investment.

On a weighted average basis, our portfolio maintains strong real estate coverage of 1.2 times. Our loans are secured by various forms of other collateral in addition to real estate, including UCC1, all asset liens on our borrowed credit parties. These other collateral types contribute to overall credit quality and lower loan to value ratios. Our portfolio has a loan to enterprise value ratio on a weighted average basis of 43.5%. As of September 30th, calculated as senior indebtedness of the borrower divided by the fair value of total collateral to refund.

Distributable earnings per weighted average share on a basic and fully diluted basis were approximately $0.50 and $0.49 for the third quarter, a modest decrease from $0.52 and $0.51 respectively during the second quarter. And in October we distributed the third quarter dividend of $0.47 per common share declared by our board in September.

Our book value per common share outstanding was $14.71 as of September 30, 2025, and there were approximately 21.5 million common shares outstanding on a fully diluted basis as of such date.

We continue to expect to maintain a dividend payout ratio based on our basic distributable earnings per share of 90 to 100% for the 2025 tax year. If our taxable income requires additional distributions more than the regular quarter dividend to meet our taxable income requirements, we expect to meet that requirement with a special dividend in the fourth quarter. Operator, we're now ready to take questions.

Thank you. We will now begin the question-and-answer session. To ask a question, you may press start then one on your telephone keypad.

If you're using a speakerphone, please pick up your handset before pressing the keys to withdraw your question, please press star, then 2.

At this time we will take today's first question from Erin Gray with Alliance Global Partners. Please proceed.

Hi, good morning and thank you very much for the questions here.

First question for me, I just want to talk about the pipeline a bit. So 4:15, I know it's down a little bit from prior quarters. So just wanted to talk a bit where there's some large potential originations that exited the pipeline, and I know prior quarter you had talked about Epos and potential opportunity there so wanted to see if you still see those as appealing and within the pipeline opportunities.

Thank you.

Yes, ESOPs continue to form a large part of the pipeline.

There was no significant exits other than ordinary turnaround of our pipeline quarter over quarter. We have our pipeline tends to refresh, every quarter or so as deals that as deals either disappear, get turned down by us or get funded, and so.

Changes quarter over quarter ordinary term.

Okay, great, glad to hear ESops are still a good opportunity for you guys. Second question for me just in terms of some of the loans that are maturing before year end, any color you can talk about in terms of how those conversations are panning out. I know you're still, targeting, net portfolio growth for the year, so any color on those would be greatly appreciated.

We are in the midst of negotiating.

The terms under which we may extend to maintain the business and maintain the position.

And I expect that the vast majority of those loans that are maturing before the end of the year, we will retain in some form or another.

Okay, that's great to hear. Last question for me, no direct. Implications for for new cannabis legalization in the election today, but some indirect, particularly for Virginia, if there is a new government that comes in that's more pro cannabis, particularly looking at that state. I know new states coming online could be, a good opportunity for you guys. So have you, how would you guys actually to look at a state like Virginia in terms of the opportunities there, and how the regulatory landscape exists today and could exist tomorrow based on past legislation for retail set up?

Thank you.

We think Virginia is a very attractive medical market due to its very controlled licenser structure and and the way in which the regular has set up the geographic orientation of license holders, and we think it'll be an extremely attractive recreational market as well. So as it as as those discussions progress, we'll be looking to expand our relationships in the state and deploy capital.

Okay, great, thanks for the call I'll go ahead and jump into the queue.

Thanks sir.

And today's next question comes from Chris Muller with Citizen Capital Markets. Please proceed.

And and congrats on another solid quarter here. So you guys have done a really great job, underwriting a pretty challenging part of the market here. So can you guys talk about your approach to underwriting and what's driving that success? Is it more the type of borrowers you focus on for the geographies or maybe a combination of those?

Yeah, I think you've hit on some of the key points. The first, I think the foundation of our underwriting is an analysis of each of the markets, each of the market, each of the markets of the 40 states that have legalized medical or recreational cannabis, and that underwrite begins before we've deployed a single dollar into that market. And it's not just to focus on this, on the state, it's also a fo it's also a deeper dive into each piece of the supply chain within that market.

We focus on limited license jurisdictions, because we find that in these spaces, the regulatory mode creates greater predictability of wholesale prices, margins, and the competitive environment.

Within that framework, we focus on operators with a diverse source of earning streams, whether that's earnings coming from a diverse portfolio of retail operations, retail and vertical integration, or retail vertical integration spread across multiple limited license states.

Yeah, it's all very helpful and I guess.

And then and then lastly, and in addition to apologies, in addition to real estate collateral, we're focused on lending to operators at conservative leverage levels of under 2 times.

And the combination of all of these factors frankly allows for diversity of repayment, diversity of potential growth opportunities. And then while we're instructuring loans, I think it's important that in the majority of our loans, not only is our capital going towards growth initiatives that drive to improvement.

And the majority of our loans also include amortization. And so the aims that the aims that are Our loans will be less risky by their maturity date, by virtue of even the growth and loan pay down than they were at the outset, and that we can then continue to support those clients in the next phase of their growth, whether that's acquisitions, expansion of cultivation, expansion of retail.

And it's it's really just consistency with what we think are pretty simple fundamental approach to this industry, a focus on credit quality and a focus on principal protection that's allowed us to maintain the track record through a lot of volatility in equity valuations and in and in the marketplaces, the operating marketplaces in each of these states.

Yeah that's very helpful and I guess maybe looking forward a little bit. So looking at the LTVs your portfolio, they're well below what we see for a typical commercial mortgage rate. So if we do end up getting some type of reform, whether it's this year or next year, whenever that timing is, what type of normalized LTV would you expect to see in the portfolio?

Well, it's a difficult, it's a it's a difficult question, it's a difficult question to answer, cause there's a few variables.

I would expect that in the case if the reform that we're discussing about is rescheduling.

I haven't seen examples of a significant amount of new lenders entering the market.

In the event of rescheduling.

And so I think there's there's opportunity to increase our loan sizes in many cases with many of our borrowers by nature of the improved cash flow dynamics of operators in a rescheduling environment because of the lack of the impact of 280E taxes.

So that's one reason why you might see loan balances go up in a post rescheduling world because the fundamental cash flow profile of the industry and of individual operators has improved significantly.

But also on the other hand.

I would expect there to be a lot more equity interest.

In the sector as a result of rescheduling. And so I'd expect to see the denominator, the V in that ratio increase significantly, starting with the starting with public operators and public cannabis valuations. And so the combination of those two is difficult, it's difficult to parse exactly what would be the what would be the change in LTV.

Got it. There's a lot of unknowns out there still, so that's very fair.

Yeah, but I would note that.

We we focus in our underwriting on the ability of a cannabis operator to service its indebtedness and to pay back that indebtedness.

And that was our focus when cannabis companies were valued in the high 10s.

EBITDA.

And that's our focus today when cannabis companies are valued in single-digit EV to EBITA.

And so it, I think it's an and and so that's why the understanding of the cash flow and diversity of cash flows and the collateral is really fundamental to us and more fundamental to us than an ephemeral, potentially ephemeral market cap, potentially ephemeral license value.

Got it. It's all very helpful and I guess, just one clarifying one real quick if I could, did I hear you guys correctly say that 86% of the portfolio has active floors in place as we sit today?

That's a combination of floors and fixed rate.

Got it. Alright, that was all the questions I had. Thanks very much.

Thank you, Chris.

And the next question comes from Pablo Zuanic with Zuanic & associates. Please proceed.

Thank you and good morning, everyone. Peter, I realize that every company is different, but for example, IIPR this morning announced an investment outside cannabis, AFC Gamma, transforming into a BDC, investing outside cannabis. Chicago Atlantic BDC also is investing outside cannabis. Is that something that Chicago Atlantic Real Estate Finance would also consider given the environment in cannabis?

We have on occasion Invested outside of cannabis, but we find that the risk reward profile for real estate backed loans in the cannabis space is simply much more attractive than the risk reward in most cases than the risk reward profile of real estate backed loans in in non-cannabis real estate opportunities, and that's what's driving. That's what's driving our focus and the and the overwhelming allocation of the portfolio to cannabis opportunities in refi.

But to the extent that changes, to the extent that we find attractive, real estate packed opportunities, we will certainly offer them to refi and may deploy them in refi.

But Chicago Atlantic was founded.

Was founded with a focus on idiosyncratic and niche areas of the private credit market, and with a focus on cannabis.

And that's part of our DNA and that focus on cannabis and our fidelity to the sector is not going to change.

And it, and it's one of the reasons why we've, why we've persisted in this industry and continued to deploy in this industry as the equity markets have experienced significant volatility as other lenders have exited the space. We think that focus and specialization can drive outsized returns and really differentiated returns for our investors, and that we can provide a better product, better support, better relationship.

With our clients, with our borrowers.

And we find that that that consistent presence in the market, that consistent support to our borrowers leads to better relationships, leads to more longevity of relationships, and leads to a greater ability for us to build a relationship with the next top operator that emerges from the ecosystem.

Right, that's good.

Thank you. Just moving on in terms of 280E, you explained in the prior question that your main focus is on a company's ability to service debt, right? So how do you think about the uncertain tax provision that most MSOs have, right? The majority of them, well, most MSOs, not the majority, like pretty much all of them except one, are paying their taxes, declaring taxes as a normal corporation. And assuming to AD does not apply and based on lawyers and auditors' recommendations, they are an advised, they are putting an item that's called uncertain uncertain tax provisions or benefits as a long-term liability, right? Which we will see if it's ever due and it doesn't have a maturity date. But how do you factor that in your ability to service debt?

We consider it as another form of leverage.

And so, we aim to create covenants that limit the ability of our borrowers to incur uncertain tax liabilities above a certain amount, and that amount is set by our comfort of the total leverage profile of the company.

Okay, that's good, thank you. Look, I know we normally do not talk about specific borrowers, but you mentioned Verano, in your, prepared remarks.

I'm trying to understand here the dynamics. In the case of Verano, Chicago Atlantic, I believe as a group, not just refi, has about a $300 million dollar facility, $292 million book in Verano due next year, right?

And now you have issued these revolvers for $75 million and $0.03 year revolver. I'm trying to understand the dynamics in terms of why not just restructure the whole thing and, just have to restructure the $300 million loan that was due next year. But given that we don't know what's happening reform, you might have just, I'm just trying to understand why not that as opposing to, issuing a 3-year short-term revolver here.

We have incredible respect for the team at Revolver at Verano, and what the team at Verano has accomplished, what they're executing on today, and their growth prospects. And we think their footprint, their asset base, and their mindset when approaching the industry, is something that we, that.

That we that we think is really unique within the space, and we really value the partnership.

And so to the extent that we can support them in any way, we're going to be ready and willing and we'll do our best to to further their next growth initiatives and that applies for that applies for the rest of our portfolio as well. And, so I can't, I don't want to speak for what, the team's aims are and how they wish to structure their balance sheet, except to say that, we value their relationship, we value their partnership, and we'd love to support them in any way we can.

And and and And I'm really excited for For what they're executing on within their portfolio.

Okay, and one last one, if I may, I know that we discussed, the competition from other sectors before. I was recently at the Blank Rome conference. Bank need them there, they said that they had issued about $500 million in loans to the cannabis sector, including CoreLI most recently. They said it would never go to $2 billion but they implied that they could, double the current amount. So my read is that the competition from the regional banks and the current regulatory.

Status quo is increasing whether it's Valley Bank, Needham, or other people. Am I wrong about that, Peter?

I think those those banks that have those banks that have developed an expertise that have invested in the infrastructure and invested in the relationships of the cannabis space. In general, those banks have done well because they've they've they've deployed capital with discipline and conservatism and built relationships with some of the strongest operators in the space. And in many cases, those banks are now opting to go deeper because they've seen, they've experienced success.

And so I think we're, I think we've seen that among some of the largest banks that have consistently deployed capital in the space that they're seeking to do more, and that's great. We view banks as partners in our in our deployment strategy. There are leverage providers in both our public and private funds. And there are co-lenders in many transactions. There are co-lenders in Unitrans transactions in many transactions. And so we think they're an integral part of the lending ecosystem, and they're part of this process of building a mature capital markets for the cannabis industry. And I think To compare, just to compare where the banking industry sits within the broader private credit ecosystem today.

Banks are not outside of the cannabis industry.

Thanks are thanks are operators alongside of the private credit space and the private credit space, and whether that's mortgage rates and or BDCs operate alongside the banking banking ecosystem and they benefit one another significantly and work together as part of this ecosystem. And that's what we hope to see develop in the cannabis industry, and that's what And that's what we're trying to build in Chicago Atlantic through our various partnerships with nearly all of the major banks that are operating in the cannabis space today.

So long story short, we welcome and and have worked to help banking institutions enter the cannabis space, and we hope more will do so.

Look, I'm sorry, I want to add one more question if you don't mind. I apologies if there's someone else on the queue here. Can you give an update in terms of your, lending program to the New York, I think it's your loan is to a regulator, right? It's not. To a fund they are not necessarily to the stores. I think we're up to 251 stores. Obviously the state continues to expand in terms of retail stores, but I haven't seen necessarily that reflected in your loan book or maybe I'm missing something. But if you can provide an update on that, thank you.

I'm sorry, Pablo, I lost you at the beginning of your question. Could you, could you.

Repeat it? Okay, I'm going to repeat that. I'm talking about New York State. In terms of the number of stores and dispensaries in New York continues to grow. We're I think north of 250 now, and I thought that given the agreement that you have with the regulator there in terms of the funding, the fund there. That as the number of stores increases that you're lending to the program would have increased, but I don't see that reflecting in your loan book or or maybe I'm missing something, and I'm sorry if it's a bad connection.

Mm, no, thank you. The New York Social Equity Fund has opted not to draw additional capital from our funds. They've supported and supported the construction of close to 23 stores across the state.

And and if they've taken a pause on on deployments. That being said, we are ready and willing to support them if they decide to continue deployments and continue to to grow the portfolio of stores that that they're supporting.

Got it thank you.

This concludes our question-and-answer session for today. I would now like to turn the conference back over to Peter Sack for any closing remarks.

Thank you all for the support and the questions. Glad to follow-up offline with any questions and please reach out at any time.

Thank you again.

The conference is now concluded.

Thank you for attending today's presentation. You may now disconnect.