Welcome to the Chicago Atlantic Real Estate Finance, Inc. First Quarter 2022 Earnings Conference Call. My name is John, and I'll be your operator for today's call. And I will now turn the call over to Tripp Sullivan of SCR Partners.

Thank you. Good morning. Welcome to the Chicago Atlantic Real Estate Finance Conference Call to review the company's results for the first quarter of 2022. On the call today will be John Mazarakis, Executive Chairman; Tony Cappell, Chief Executive Officer; and Andreas Bodmeier, Co-President and Chief Investment Officer. Our results were released this morning in our earnings press release, which can be found on the Investor 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 herein are as of today, May 12, 2022, and will not be updated subsequent to this call. During this call, certain comments and statements we make may be 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 risks 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 and adjusted 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 John Mazarakis. Please go ahead.

Thanks Tripp, good morning everyone, and thank you for joining us today. This has been a quick turnaround since our Q4 reporting in mid-March, so I want to address some of the macroeconomic issues that are grabbing everyone's attention before we briefly summarize our activity since the last call. Let's start with the issues of the day. While there are real concerns in the broader market with rising rates, the war in Ukraine and whether the Federal Reserve will push the economy into a recession, we believe all perspective has been lost on the growth potential in cannabis lending. I think the market may have also lost sight of the reasons why we have been so bullish on this sector in the past four years. There is no disputing that rates are rising and that there has been substantial disruption in the equity markets for cannabis operators. What's been lost is that this business is incredibly resilient, countercyclical and uncorrelated to the broader market. It acts much like the pharmaceutical industry as well as alcohol and tobacco. Those sectors continue to demonstrate varying elastic demand, and cannabis is much of the same. Cannabis is growing by close to 20% per year, and this growth is not contingent upon the broader economy. This growth is tied to regulatory matters and to the expansion of licensing within an existing state. This is one of the few industries that exists that you can directly correlate new regulations and new licensing with demand for capital. New Jersey is a great example. Previously, a $300 million medical market. Now with a move to adult use, it is easily a $1 billion retail market, recession or no recession, it will remain so. This is why we're so busy. States like Georgia, Ohio, Illinois, Arizona, Maryland, and Alabama are adding new licenses, and Florida has a new license as well. These are states that are driving our growth. Approximately 63% of our loans are tied to Prime. We do not have any LIBOR-based loans. These floating rate loans allow us to adjust with the market. You'll note that as of May 10, our weighted average yield to maturity increased to 17.5%. I would also highlight that our portfolio today has $337 million in commitments and a market cap in excess of $290 million as of Monday. We have incurred no leverage as of March 31 and have since borrowed $30 million against our credit facility. We're trading at an unlevered yield to book of approximately 10.6%. That's why I think we need to bring back a little more perspective to what's going on in our markets and in our business. Our operators are in great shape as well. They usually have no leverage other than our loans. Typically, you would have operators carry a 4 to 6 times debt-to-EBITDA ratio of leverage, and then a mortgage REIT would carry a couple of turns of leverage on top of that. That's not the case in our portfolio. One of our newest loans is with a borrower who currently has $11 million of EBITDA, and our loan is only $17 million. This borrower has no other debt on its capital structure. My goal all along has been to continue building on our reputation as a capital provider that can be trusted and to grow together with the leading operators in the industry. We primarily target the limited license state with operators that are vertically integrated, and we have been able to pick and choose the borrowers we want to back. Our disciplined approach produces a higher yielding and very well-collateralized portfolio. With this, I will turn to Tony. And Tony, why don't you take it from here?

Thanks John, good morning everyone. We continue to execute on growing our pipeline, putting capital to work at yields and with collateral coverage exceeding our targeted ranges. We are also building momentum with our platform based on strong relationships, a targeted originations effort, and a well-earned reputation within the industry as the lender of choice for leading cannabis operators. Since our Q4 earnings call was only six weeks ago, I don't want to repeat much of what we said and did then. What I would prefer to highlight is what we've accomplished during Q1 and to date in Q2 within the portfolio and with our originations team as well as reinforce how we are achieving these results. Let's start with the how first. Recall that some of the key differentiators for us are that we have our own originations team that sources our loans and that we structure these loans so that we are our borrower's only source of debt with the REIT as the lead or the co-lead on the facility. The common theme with both approaches is that we build and maintain the relationship with our borrowers. That relationship is crucial in terms of being able to grow with them and also getting the monthly compliance reporting and detail that enables us to keep our finger on the pulse of operations and market conditions. I can't stress enough the importance of creating the relationships directly the way we do at Chicago Atlantic. We know what our borrowers need, when they need it, and how they are managing through the challenges of meeting the accelerated demand for their product. During Q1, we funded a total of $86.7 million in gross principal, represented from new and existing loan commitments. To date, in Q2, we have funded an additional $25 million, $17 million of which was to a new borrower and $8 million was to an existing borrower. Year-to-date, we have had two payoffs totaling $3.6 million, resulting in a total of $337 million of commitments and a weighted average yield to maturity of 17.5% as of May 10. Lastly, our pipeline feels endless with over $900 million of near-term opportunities. Looking ahead to the balance of the year, we will continue to keep a measured pace. It's clear to us there is no shortage of demand for capital from operators, but we will continue to balance this demand with the need to fuel it with attractive sources of capital, and we will only cherry-pick the best of the best deals. Lastly, I'd like to highlight this quarter's increase in the dividend. For Q1, we paid out a dividend of $0.40 per share, representing a 54% increase from the Q4 dividend. That's an annualized rate of $1.60 per share, resulting in a yield of 9.73% on the May 9 closing stock price and a 10.6% yield-to-book value. Also, we expect steady dividend growth in the quarters to come. Now Andreas will walk us through our investments, capital plan, and financial results.

Thanks, Tony. Good morning. We did a good job of outlining our investment activity in the earnings release and supplemental, so I'll reference both documents and provide some additional commentary. At March 31, our loan portfolio has grown to total loan commitments of $321 million across 22 portfolio companies. It has a weighted average yield to maturity of 17.2%. And as Tony noted a moment ago, as of May 10, the portfolio has grown to $337 million with a yield of 17.5%. All loans are current and performing. During the quarter, we had only one loan totaling $3.1 million pay off at maturity. I would highlight that our portfolio is currently 63% floating rate based off of the prime rate. So we have been able to manage the impact of rising rates to this point. The demand for debt capital is as strong as ever, and the opportunities we have sourced in our pipeline continue to meet our yield targets. Sourcing capital is our greatest challenge and opportunity right now. We have utilized our IPO proceeds this quarter and borrowed $30 million to date in Q2 on the credit facility. We're actively working to increase that facility with additional banks to meet the growing demand shown in our pipeline and in our signed term sheets. Our goal all along has been to use this facility and possibly a bond or debt offering to reach a target of only half a turn of leverage by year-end. Should those options not provide enough capital quickly or accretively, then we will look to the equity markets in the second half of the year to help us grow. Turning now to our financial results of our first full quarter as a public entity. There are a few points to highlight from our Q1 print. Our total interest income is beginning to reflect the deployment of our IPO proceeds. While the interest income of $9.8 million increased sequentially from $5.8 million in Q4, we expect to see the full effect of the deployment of IPO proceeds and the use of the credit facility in Q2. Total expenses for the quarter were $2 million, which includes management and incentive fees of $671,000. Recall that the incentive fees had been waived in Q4. We had G&A of $556,000 and professional fees of $557,000. Our plan to charge the incentive fees for the first time in Q1 was noted on last quarter's earnings call. G&A is consistent with the guidance we gave last quarter of $2.5 million to $3 million for the year, and the sequential increase in the professional fees was almost entirely related to accounting and audit fees. Pursuant to ASC 326, we increased our provision for expected credit losses by $51,000 in Q1. In determining this reserve, we noted that 93% of the portfolio is fully secured by real estate, and 7% has limited or no real estate collateral. Our portfolio on average has real estate collateral coverage of 1.9 times as of March 31, 2022. All of our loans are secured by equity pledges of the borrower and all asset liens. And while the CECL reserve was added back to our calculation of distributable earnings consistent with Q4, we have elected not to add back the incentive fees to our calculation of distributable earnings and adjusted distributable earnings. This is a slight definitional change to the calculation from what we had originally intended, but we believe it is the right decision to make and provides a clear indication of our ability to pay dividends to shareholders. After factoring in these items, our adjusted distributable earnings per share was $0.45 per diluted share for Q1. And as noted last quarter, our weighted average share count for Q1 reflects most of the impact of the 17.8 million shares outstanding post-offering and post-greenshoe exercise in January 2022. Our book value as of March 31 was $15.17 per common share.

We're now ready to take questions.

Everyone, thank you for taking my questions. Obviously, you guys have put capital to work quickly and yields are really strong. It sounded like you started working into the credit facility during the second quarter. You discussed some options for capital, but given your pipeline, it seems like you could be running tight pretty quickly here on availability. How quickly do you expect to be able to access some new capital on the debt side? What are the actions you're taking? Just any sort of updates so we can think about how to build out deployment in our models?

So we have the flexibility to increase our credit facility, are upsizing it imminently and an indication of interest from other banks in participating as well. We are heavily focused on pursuing debt this and next quarter, including a debt offering. Now we're all aware that both rates and spreads have increased since we did the IPO. We will pursue a debt offering only if it's accretive and otherwise look to the equity markets for the second half of the year.

Right. And then on that note, obviously rates being up, valuations being down across the cannabis space, are you seeing more opportunities with larger MSOs? Are they becoming a bigger priority in your pipeline? How is the yield profile changed? Any sort of update on your pipeline and borrower preference.

Hi. Aaron, this is John. We haven't really focused on MSOs as of recent. Our main focus remains the middle market. We're interested definitely in multistate operators that are operating in two, three states, but the middle market is our bread and butter, and we will continue to focus on that.

Great. Appreciate the time guys.

And our next question is from Gaurav Mehta from EF Hutton. Please go ahead with your question, Gaurav. Your line may be on mute. We will go to our next question; it's from Mark Smith from Lake Street Capital Markets.

Hi guys. Can you just discuss during the quarter, the mix of new borrowers versus existing?

Is this a question for Q1 or year-to-date?

No. For Q1, I think, and even if you want to give us kind of the full year-to-date would be okay, that would be great?

Yes. The majority of the fundings were to new businesses. We did upsize one that was in the existing portfolio. And then one of the fundings, as we said in the script was an upsize. So two of them are upsizes the rest were new borrowers.

Okay. And of those upsizes, one was post Q1, correct?

That's right.

Perfect. And then two questions that are just kind of big picture questions. Any thoughts that you guys have right now on kind of changing legislation, new legalization, any states that you're really looking at or anything at the federal level as you guys look into your crystal ball that you're kind of maybe anticipating or looking forward to?

We're hoping for more transitions from medical to rec, similar to the one we saw in New Jersey. Those tend to be very accretive for our space. As a whole, we don't expect any sort of regulatory relief at the federal level. So that's kind of like our overall view state versus federal.

And to add to that, we've seen – obviously, to John's point on New Jersey, it usually has an effect on the contiguous states. So we're keeping an eye on Pennsylvania. Obviously, there's positive momentum in Delaware and then, of course, Maryland. So those are some of the states we're watching out for that do create significant opportunity as well as just creating a much more robust environment to lend money into.

Okay. And then last one for me. I know you guys focused on kind of limited license states. Any states to call out that are seeing some of this industry weakness that's kind of bleeding over from the West Coast? Any states to call out that maybe have seen a change in kind of the weakness?

So east of the Mississippi, we have two states that are closely monitoring, and that is Michigan and Massachusetts. Those two states have seen a major compression both on wholesale and retail prices. So we're very focused on understanding those states in a granular manner, and we're technically staying away from them for the time being.

And also, these are things that we knew early on. They were not limited license states from a state perspective. So the focus has always been on the scale producers, at least from a wholesale perspective. And those are the players that are going to end up obviously weathering the storm and then thriving as they become more like an efficient market similar to Colorado. So we spend a lot of time looking at Colorado and their ultimate slope of compression, and that's really how we played that space in those particular states.

Okay. Perfect. Thank you guys.

Thank you.

Our next question is from Gaurav Mehta from EF Hutton.

Yes. Thanks. Good morning. Going back to your comments about sources of funding and potential upside of your credit line. So you have $30 million outstanding on the credit line, the total capacity is $45 million. So if you guys would upsize that, how much capacity should we think about? And then you also talked about potential debt offering, if you were to issue that, what kind of rates are you looking at?

So on the credit facility, what we expect is to see sequential upsizes as we bring in new banks. We have a number of banks in the data room. That will happen incrementally. And we're on track to exceed $100 million throughout the rest of the year and into the middle of the year. Regarding debt, we have not gone out to market. We are aware of the market environment of both rates going up and spreads widening. I think in our position after this quarter, we will be heavily focused on pursuing a debt offering. But to reiterate, it has to be accretive, and we will not do a debt offering at all costs.

Okay. Great. Second question on your yields, 17.5% as of May. As you look in the marketplace and look at the new loans, should we expect the yields to stay at 17%, 18% level? How do you expect yields to evolve over the next 12 to 18 months?

Yes. We actually don't expect any yield compression. I think rates are positioned well to stay where they are currently.

Okay. Great. That's all I have. Thanks for taking my questions.

Thank you.

And it appears we have no further questions in the queue. I will now turn the call back over to John Mazarakis for final remarks.

Well, I want to thank all the analysts for their wonderful questions, and we're looking forward to answering more questions in the future as we're growing our platform. Thank you, everyone, for your time today.

Thank you, ladies and gentlemen. That concludes today's call. Thank you for participating, and you may now disconnect.