Chicago Atlantic Real Estate Finance(REFI) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Adjusted distributable earnings decreased to $0.55 per weighted average diluted share for Q2 from $0.62 in Q1, while diluted earnings per weighted average common share fell to $0.47 from $0.60 in Q1, primarily due to a higher provision for expected credit losses and stock-based compensation [10] - Total operating expenses before CECL provision decreased by 5.8%, mainly due to a reduction in net management and incentive fees [10] - The company increased its CECL reserve by $1.1 million as of June 30 [10] Business Line Data and Key Metrics Changes - The loan portfolio had total loan commitments of $329 million across 25 portfolio companies, with a weighted average yield to maturity of 19.2%, slightly down from 19.4% at March 31 [20] - New originations were limited to $1.9 million, offset by $6.9 million in principal repayments, with $5 million related to unscheduled early repayments [20] - The portfolio remains 88% floating rate based on the prime rate, consistent with the last quarter and up from 60% in June 2022 [20] Market Data and Key Metrics Changes - The company noted improvements in wholesale pricing in limited license states transitioning from medical to adult-use, indicating a cautiously optimistic outlook [18] - The Federal Reserve's recent rate increase to 8.5% is expected to positively impact portfolio yield [20] Company Strategy and Development Direction - The company is focused on a partnership with New York, committing $150 million to the New York State Cannabis Social Equity Investment Fund, with plans to replicate this model in other states [44] - The company aims to remain disciplined in pursuing new opportunities while navigating the current economic environment [18] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the volatility in the financial sector and cannabis industry, emphasizing the importance of yield in the current market [17] - The company is optimistic about transaction activity in states like Maryland and Missouri, with a robust pipeline of actionable deals exceeding $400 million [31] Other Important Information - The company’s balance sheet remains under-levered at 16% of book equity, with a debt service coverage ratio of 11.5:1, significantly above the requirement of 1.35:1 [46] - Approximately 74% of the portfolio is fully secured by real estate collateral, with a weighted average real estate collateral coverage of 1.5x as of June 30 [23] Q&A Session Summary Question: Additional details on the New York deal and potential timing for additional capital - The company is committed to the New York partnership and is working on identifying and due diligence of dispensary locations [44] Question: Observations on industry headwinds and geographic weaknesses - Management reported efficiency in operations and mentioned a scheduled sale, indicating proactive measures in response to challenges [41] Question: Details on the non-accrual loan and its implications - The carrying value of the non-accrual loan is $16.2 million, with $600,000 of income that would have been recognized had it not been placed on non-accrual status [56]