Chicago Atlantic Real Estate Finance(REFI) - 2022 Q1 - Quarterly Report

Part I. Financial Information This part details the company's unaudited financial statements, management's analysis, market risk disclosures, and internal control assessments Item 1. Financial Statements Presents the unaudited consolidated balance sheets, income statements, equity, and cash flows for the period ended March 31, 2022 Consolidated Balance Sheets Consolidated Balance Sheets Highlights (Unaudited) | | March 31, 2022 | December 31, 2021 | |:---|:---:|:---:| | Assets | | | | Loans held for investment, net | $278,644,076 | $196,850,024 | | Cash | $6,078,178 | $80,248,526 | | Total Assets | $285,907,904 | $278,170,455 | | Liabilities | | | | Total Liabilities | $16,523,388 | $14,092,487 | | Stockholders' Equity | | | | Total stockholders' equity | $269,384,516 | $264,077,968 | | Total liabilities and stockholders' equity | $285,907,904 | $278,170,455 | - Total assets grew to $285.9 million as of March 31, 2022, primarily driven by a significant increase in 'Loans held for investment, net' which rose to $278.6 million from $196.9 million at the end of 2021[13] - This growth was funded by a decrease in cash from $80.2 million to $6.1 million[13] Consolidated Statements of Income Consolidated Statements of Income (Unaudited) | | For the three months ended March 31, 2022 | |:---|:---:| | Revenues | | | Interest income | $9,833,053 | | Total revenues | $9,833,053 | | Expenses | | | Total expenses | $2,029,101 | | Net Income | $7,803,952 | | Earnings per common share: | | | Basic EPS | $0.44 | | Diluted EPS | $0.44 | Consolidated Statements of Equity - Total stockholders' equity increased from $264.1 million at the start of the year to $269.4 million at March 31, 2022[17] - The increase was driven by net income of $7.8 million and net proceeds from stock issuance of $4.5 million, partially offset by dividends declared of $7.1 million[17] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (Unaudited) | | For the three months ended March 31, 2022 | |:---|:---:| | Net cash provided by operating activities | $3,035,632 | | Net cash used in investing activities | ($77,175,374) | | Net cash (used in) provided by financing activities | ($30,606) | | Change in cash | ($74,170,348) | | Cash, beginning of period | $80,248,526 | | Cash, end of period | $6,078,178 | - The significant decrease in cash during the quarter was primarily due to $82.8 million used for the issuance and funding of loans, which is classified under investing activities[19] Notes to Consolidated Financial Statements - The Company is a commercial mortgage REIT focused on originating, structuring, and investing in first mortgage loans, primarily to state-licensed operators in the cannabis industry[21][22][23] - The Company adopted ASC 326 (CECL) at inception, which requires the recognition of lifetime expected credit losses for loans at the time of origination[34] - As of March 31, 2022, the Company had a secured revolving credit facility with a total commitment of $45 million, which was subsequently increased to $65 million in May 2022[87][134] - On January 5, 2022, underwriters partially exercised their over-allotment option, resulting in the issuance of 302,800 shares of common stock and raising $4.5 million in net proceeds[114] - A regular cash dividend of $0.40 per share was declared for the first quarter of 2022[129] Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes the company's Q1 2022 operating results, financial condition, liquidity, and capital resources Overview - The company's primary objective is to provide attractive, risk-adjusted returns through income and capital appreciation by originating and investing in loans for state-licensed cannabis operators[139] - The company is an externally managed Maryland corporation that elected to be taxed as a REIT, commencing with the taxable year ending December 31, 2021[143] Results of Operations Q1 2022 Financial Results | Metric | Amount | |:---|:---| | Net Income | ~$7.8 million | | Basic EPS | $0.44 | | Interest Income | ~$9.8 million | | Management & Incentive Fees | $671,505 | | Provision for CECL | $51,343 | - For the three months ended March 31, 2022, the company reported net income of approximately $7.8 million, or $0.44 per basic weighted average common share[160] Loan Portfolio Loan Portfolio Growth | Metric | March 31, 2022 | December 31, 2021 | |:---|:---:|:---:| | Number of Loans | 22 | 21 | | Loans Receivable (Carrying Value) | ~$278.8 million | ~$197.0 million | | Aggregate Commitment | ~$321.1 million | ~$235.1 million | | Outstanding Principal | ~$282.7 million | ~$200.6 million | | Weighted-Average YTM IRR | 17.2% | 18.6% | - During Q1 2022, the company closed credit facilities with three new borrowers with aggregate commitments of $75 million and advanced $29.2 million on existing facilities[153] - As of March 31, 2022, approximately 63.4% of the portfolio consisted of floating-rate loans tied to the prime rate, an increase from 53.2% at year-end 2021[165] Liquidity and Capital Resources - As of March 31, 2022, the company had approximately $6.1 million in unrestricted cash, down from $80.2 million at the end of 2021, reflecting the deployment of capital into new loans[181] - The company's secured revolving credit facility was increased from $10 million to $45 million in December 2021 and further to $65 million in May 2022[183][184][188] Non-GAAP Financial Measures Reconciliation of Net Income to Adjusted Distributable Earnings (Q1 2022) | | Amount (in thousands) | |:---|:---:| | Net Income | $7,804 | | Non-cash equity compensation expense | $121 | | Depreciation and amortization | $72 | | Provision for current expected credit losses | $51 | | Distributable Earnings | $8,049 | | Adjusted Distributable Earnings | $8,049 | | Adjusted Distributable Earnings per Weighted Average Share (Diluted) | $0.45 | Quantitative and Qualitative Disclosures About Market Risk Details the company's primary market risk exposures, including interest rate, credit, and real estate risks - The company is primarily exposed to interest rate risk, with 63.4% of the loan portfolio composed of floating-rate loans with prime rate floors as of March 31, 2022[211] - A hypothetical 100 basis point increase in the prime rate would increase annual interest income by approximately $1,245,000[211] - Credit risk is concentrated, with the top three borrowers representing 31.6% of funded principal as of March 31, 2022[237] - To mitigate risk, 94% of the portfolio is secured by real estate, and all loans are secured by equity pledges and all asset liens, with an average real estate collateral coverage of 1.9x[232] Controls and Procedures Reports that disclosure controls were not effective due to two material weaknesses in internal financial reporting controls - Management concluded that disclosure controls and procedures were not effective as of March 31, 2022[241] - The ineffectiveness is due to two previously reported material weaknesses: inadequate design of IT general controls and inadequate design of controls over the development of the CECL allowance[241] - Remediation efforts are underway, including hiring additional personnel, designing formal controls, and implementing a new ERP system[242][243] Part II. Other Information Covers legal proceedings, risk factors, and the use of proceeds from the company's recent equity offerings Legal Proceedings Confirms the absence of any material pending legal proceedings against the company - As of the reporting date, the company is not involved in any material legal proceedings[248] Risk Factors States there have been no material changes to risk factors previously disclosed in the 2021 Form 10-K - There have been no material changes to the risk factors disclosed in the company's 2021 Form 10-K[249] Unregistered Sales of Equity Securities and Use of Proceeds Details the deployment of net proceeds from the company's IPO and concurrent private placement - The company received net proceeds of approximately $96.2 million from its IPO and an additional $7.5 million from a concurrent private placement[250] - Since the IPO, proceeds have been used to fund approximately $78.6 million in loans to new portfolio companies and $36.1 million to existing portfolio companies[251]