What Chicago Atlantic Real Estate Finance (REFI) Said on Its Q3 Earnings Call

Key Points

• Q3 distributable earnings were $0.49 per diluted share. The $527.7 million portfolio included the Koach Notes, which contributed about $2.6 million to earnings; including their cash interest, adjusted net interest income rose roughly 18% to $15.1 million.
• Limited liquidity is expected to slow originations in Q4. Management cited about $12 million in total liquidity and said it is exploring ways to expand funding capacity, including through a proposed merger with Chicago Atlantic BDC that could provide greater scale and diversification.
• The portfolio has substantial floating-rate exposure: 64% of loans were floating-rate, and management estimated each 25-basis-point rate increase would add $0.015 per share to quarterly distributable earnings.

Chicago Atlantic Real Estate Finance NASDAQ: REFI reported third-quarter distributable earnings of $0.49 per diluted share as its loan portfolio grew following the addition of the Koach Notes. Management said it expects originations to slow in the fourth quarter as it explores ways to expand liquidity.

The company’s loan portfolio totaled $527.7 million across 28 portfolio companies as of September 30, with a weighted average yield to maturity of 14.8%, President and Chief Operating Officer David Kite said. The total includes the Koach Notes, which are presented within stockholders’ equity rather than as loans or assets under generally accepted accounting principles.

Chicago Atlantic funded $85.1 million in principal during the quarter, including $62.6 million from the Koach transaction. Repayments totaled approximately $13.2 million, Kite said. Non-accrual loans remained unchanged in dollar amount from the prior quarter and fell to 3.1% of the portfolio from 3.7%, primarily because the portfolio grew.

Koach Notes Add to Earnings

In July, the company issued approximately 4.3 million common shares at $14.353 apiece in exchange for second-lien notes with an aggregate principal balance of $62.6 million. One of the 32 Koach Notes was repaid during the quarter after a Florida property sale, generating approximately $900,000 in fee income, Co-Chief Executive Officer Peter Sack said.

The notes contributed approximately $2.6 million to third-quarter distributable earnings. Sack said the Koach portfolio has a stated annual yield of approximately 12%, but generated an annualized return greater than 18% during the quarter.

Chief Financial Officer Phil Silverman said interest, principal and exit-fee cash flows from the notes are recorded through stockholders’ equity rather than recognized as interest income under GAAP. Reported net interest income fell 2.3% from the second quarter to $12.5 million. Including cash interest proceeds from the Koach Notes, adjusted net interest income was $15.1 million, up approximately 18%.

The company paid a $0.47-per-share regular quarterly dividend in October, its 18th consecutive quarter at that rate. Adjusted book value per share, a non-GAAP measure that assumes the Koach Notes were repaid in full, was $14.12 at September 30, compared with $14.15 at June 30.

Liquidity and Merger Plans

Kite said Chicago Atlantic had approximately $15.2 million available on its senior secured revolving credit facility as of the call and approximately $12 million in total liquidity after estimated liabilities and anticipated fundings. The company increased the facility’s borrowing capacity by $7.5 million during the quarter to $117.5 million and funded another $3.2 million to existing borrowers after quarter-end.

Sack said the potential lending pipeline declined in part because of the quarter’s fundings and because available liquidity had largely been used. He also pointed to potential opportunities from expansions of medical cannabis markets, while saying a vehicle without a real estate mandate would have a broader set of opportunities.

That assessment supports management’s case for the proposed merger with Chicago Atlantic BDC Inc. Sack said the company’s board and special committee considered its relatively small scale, the investment limits associated with its REIT status and constraints on institutional capital access. The combined company could offer greater scale and diversification, he said, though increased investor interest is not assured.

Silverman said the merger materials were undergoing customary Securities and Exchange Commission review. Stockholder approvals are required for Chicago Atlantic’s election to be regulated as a business development company and for the merger. The transaction also faces other required approvals and consents.

Interest Rates and Portfolio Positioning

Sack argued that Chicago Atlantic’s portfolio differs from those of broader mortgage REITs, even though its stock has traded similarly to the sector. He said approximately 57% of the portfolio benefits from interest-rate increases and estimated that each 25-basis-point increase would add $0.015 per share to quarterly distributable earnings.

Kite said 64% of the portfolio consisted of floating-rate loans and 36% of fixed-rate loans at quarter-end. The floating-rate loans have rate floors and no interest-rate caps, he said.

About Chicago Atlantic Real Estate Finance (NASDAQ:REFI)

Chicago Atlantic Real Estate Finance, Inc. NASDAQ: REFI is a specialty finance company organized as a real estate investment trust (REIT). The company focuses on originating, acquiring, and managing commercial real estate loans and other credit investments, with an emphasis on opportunities in the cannabis industry. Chicago Atlantic Real Estate Finance primarily provides senior secured loans to state-licensed cannabis operators, cultivators, processors, dispensaries, and related businesses. Its financing may be secured by commercial real estate, cannabis-related assets, or other collateral.

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