Operator: Good day, and thank you for standing by. Welcome to the Chicago Atlantic Real Estate Finance, Inc. Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today Tripp Sullivan of SCR Partners.

Tripp Sullivan: Thank you. Good morning. Welcome to the Chicago Atlantic Real Estate Finance Conference Call to review the company’s results for the fourth quarter of 2022. On the call today will be John Mazarakis, Executive Chairman; Tony Cappell, Chief Executive Officer; Andreas Bodmeier, Co-President and Chief Investment Officer; and Phil Silverman, Interim Chief Financial 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 the 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, March 9, 2023, 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 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.

John Mazarakis: Thanks Tripp. Good morning and thank you for joining us today. As this quarter represents the completion of our first full year as a public company, I’d like to take a moment to thank our Chicago Atlantic team members and our investors who have made this year a phenomenal success. When we entered the cannabis space in 2019, we saw it as one of the few true sources of alpha available in the market. As we all know, those opportunities don’t come around very often. We believe this industry has barely scratched the surface of its true growth potential. I provided a number of stats last quarter on comparing this industry over the last three years to beer, wine, tobacco, and pharmaceuticals. I don’t want to tread that ground again, but I do encourage everyone to look at how fast cannabis has grown compared to those industries.

No matter which source you use, the industry size, anywhere from $30 billion to $40 billion currently with expectations of growing somewhere in the neighborhood of $50 billion to $75 billion in top line retail sales within the next five years. The capital need for such growth will also be in the tens of billions of dollars, considering that on the one hand, we’re converting the illicit market to a legal market, and on the other hand, we have few new adopters trying the medical and adult use products. The size of this market along with the lack of institutional capital in the space represents tremendous alpha, and in addition to this dislocation that we have exploited for the better part of the last four years, top tier existing debt in the cannabis space will soon be within a year of maturity and will need to be refinanced and that’s repriced.

To be honest this is why we elected from day one to stick with shorter term maturities on our loans. Operators are perpetual optimists by nature and continue to believe that federal legalization or some other legislation like say, will pass soon. As a result, they have been hesitant to lock in longer term loans. That has put us in a better negotiating position with more flexibility in the rising interest rate environment. Our thoughts on the impact of SAFE Banking Act are also well established. We don’t think it’s imminent. We believe that if some form of the SAFE Banking Act passes in the end, we benefit more than others because we have the largest credit platform in the space. Capital providers that are not currently in the space will want to put sizable capital to work quickly with platforms like ours rather than to build up the expertise within their own underwriting and lending groups.

In addition to the SAFE Act, I also want to mention the state level initiatives we’re tracking. Missouri and Maryland have turned adult use and we’re actively working on deals in both states. Minnesota is also a state that we expect to soon legalize adult use cannabis. What is particular intriguing is recent speculation that AG Garland is working on a new memo regarding cannabis scheduling that would replace the coal memo that AG Sessions rescinded during the Trump administration. While the DOJ has been working on that for some time, should it be issued, it could potentially have as much impact for us as SAFE Banking. It could once again free up the capital markets to funnel more capital to proven platforms like ours and result in an overall lower cost of capital for the week and for our borrowers.

Our best source of capital currently is our credit facility. We have expanded it to $92.5 million last quarter, and we have extended it to the end of 2024. We also retained the extra one year extension option without any fees. As Andreas will note later, we’re actively working to expand that banking group and grow the facility further. Last month, we also took advantage of a request from some institutional investors to sell $6 million of common stock at $15.16 per share. This was obviously above book, so we thought it was great execution and did not involve any underwriters. As we disclosed in our earnings release, we initiated an outlook for 2023 rather than a specific range we believe a better way to project the year is in terms of our expected regular quarterly dividend and our targeted payouts based on distributable earnings.

We expect our dividend to be at least $0.47 each quarter. We also expect to continue to payout 90% to 100% of distributable earnings. Should we need to payout more of a dividend to maintain our taxable income thresholds, our intent is to meet that with a special dividend. We believe a conservative longer term approach will be better rewarded in the end. Tony, why don’t you take it from here?

Anthony Cappell: Good morning everyone. I would like to focus my time today on how to think about our originations, the pipeline, and our thoughts on the state of the industry in general. We continue to focus on the best-in-class operators, many of whom are vertically integrated and are the lowest cost producers in their markets. As we’ve described before, we monitor local market pricing every week and closely monitor how that’s trending for both cultivation and retail and stay in regular contact with our borrowers. The opportunities were seen vary state by state. We’re experiencing a spike in opportunities within states on the verge of recreational or adult use approval. Recall that we target limited licensed states with a preference for those that have yet to go recreational and then grow with those operators as they see more demand.

We like Missouri, Maryland, and Arkansas for that reason. Turning to our existing pipeline. We continue to be very active across the entire Chicago Atlantic platform. As we discuss on our last call, we believe we reset the pricing among cannabis operators by serving as the lead and agent for a new four-year $350 million facility for our largest multi-state operator. The REIT retains its $30 million commitment in that facility. In addition, the REIT made an $11.25 million real estate back loan to MariMed in early January. MariMed continues to outperform many of its peers, even with exposure to markets with more pricing compression. With these loans and others, we have maintained our robust structuring upfront, intensive loan monitoring, and strict financial covenants.

Recall that we also have all asset liens from borrowers that are in addition to the 1.7 times real estate collateral coverage we have on our portfolio. As anticipated, we are also able to increase the percentage of the amount of floating rate loans from 60% to quarter ago to 83% as of year-end with attractive prime rate floors. We are well aware of the pressures operators are facing with price compression continuing in many markets, higher labor costs, inflation, and the increasing likelihood of some form of recession later in the year. As lenders, it’s our job to assess these risks on a regular basis and to ensure the preservation of capital. This industry is not with free, no industry is, but we believe our history of direct lending within cannabis commercial real estate and other sectors have better prepared us to address any challenges this environment might present.

As John noted earlier, with many capital providers having exited or in the process of exiting the sector, we have the opportunity to be even more selective with the operators we underwrite. This has created an environment where demand far exceeds the supply of capital, which enables us to tighten structures even further and increase what we are able to charge, and that increases the return on a risk adjusted basis. We have proven we can source attractive debt and equity capital across Chicago Atlantic platform to meet this demand. We’re confident that our stringent underwriting, combined with the leading platform and long-term commitment to sector, will keep us positioned to continue to drive value for our shareholders. Now, Andreas will walk us through our investments.

Andreas Bodmeier: Thanks Tony. At December 31, our loan portfolio had grown to total loan commitments of $351 million across 22 portfolio companies. It has a weighted average yield to maturity of 19.7%, up from 18.3% at September 30. Net new originations during the quarter were $5.9 million comprised of subsequent advances on delayed draw term loans to four existing borrowers. Our new originations also include the refinancing of two credit facilities with outstanding principle balances of $30 million and $10.6 million for a combined total of $40.6 million. We increased our position in one of those facilities from $10.6 million to $13.1 million and retained our $30 million hold in the other. We continued to be very disciplined in deploying the REITs available capital to focus on strong credit operators and fulfilling the growth capital needs of existing borrowers.

In the period subsequent to year-end, we received approximately $6.5 million in early principal repayments and raised another $6 million in equity capital last month. With the increase in the REIT credit facility to $92.5 million, we currently have $20 million of liquidity to put to work in the coming months. The originations pipeline remains full with the Chicago Atlantic platform continuing to address that demand. We still view our credit facility as the primary means for funding our portfolio growth and have continued discussions with banks to potentially join the facility later in the year. All loans are performing. Our portfolio is currently about 83% floating rate based off of the prime rate, which is a substantial increase from only 60% floating within the portfolio as of Q3.

That increase was made possible by the new loans closed during the quarter, allowing us to benefit from rising rates more directly. The 140 basis point improvement in our weighted average portfolio yield of 19.7% this quarter was primarily due to the 125 basis point increase in the prime rate. With the Federal Reserve expected to continue raising the Fed funds rate in the first half of this year, we should expect to see another increase in the portfolio yielding Q1. Our leverage increased slightly from 20% in Q3 to 22% at year-end, but we are still well below our original leverage targets. I’ll turn it over to Phil now to review our financial results.

Phil Silveran: Thank you, Andreas. Turning now to our financial results. Net interest income increased $1.8 million or 14.1% to $14.8 million compared to $12.9 million in Q3. Total net interest income was $48.9 million for the year. The improvement in Q4 resulted from the two increases in the prime rate and the refinancing in Q4 of approximately $40 million in principle and improved yield economics. Total operating expenses for the quarter were $5 million compared with $2.9 million in Q3. These expenses included management and incentive fees of $3.3 million and aggregate G&A and professional fees of $1.6 million. Total operating expenses for the year were approximately $16.6 million, including management and incentive fees of $6.6 million and aggregate G&A and professional fees of $5.7 million.

The primary driver of the increase in operating expenses in Q4 as compared to Q3 is the incentive fee expense of $2.3 million in Q4, which compares to the $519,000 in Q3. This is in line with expectations. As discussed last quarter, the incentive fee is calculated on a rolling 12-month basis and in Q4 2022, the impact of the prior year incentive fee waiver of $1.1 million in connection with our IPO is no longer a reduction to the annual incentive fee calculation. I’d like to highlight that the larger quarterly incentive fee paid in Q4, 2022 will contribute in a similar way to the rolling 12-month incentive fee calculation throughout fiscal year 2023. Adjusted distributable earnings per share was $0.57 per diluted share for Q4 and $2.11 for the year ended December 31st, 2022.

In January, we distributed a Q4 regular dividend of $0.47 per common share, plus a special dividend of $0.29 per share, with total dividend distributions to shareholders amounting to $2.10 per share for the year. This was approximately 99.5% of adjusted distributable earnings. Diluted earnings per common share was $1.82 for the year ended December 31st, 2022. The Q4 diluted earnings per share was $0.41 compared to $0.55 in Q3. The decrease of $0.14 per common share was primarily due to the increased provision for expected credit losses of $2.5 million to a total reserve of approximately $4 million at December 31st, 2022. The quarterly CECL reserve considers both macroeconomic conditions and borrower financial performance as well third-party loan loss data representative of our portfolio.

Our borrowers are currently performing and portfolio outlook remains strong. However, the continued rising rate environment and our current expectations of portfolio company performance through the forecast period contributed to our CECL reserve, which approximated 1.2% of outstanding principle as of Q4. Approximately 87% of the portfolio based on outstanding principle is secured by real estate with 13% having limited or no real estate collateral. Our portfolio on a weighted average basis had real estate collateral coverage of 1.7 times as of December 31st, 2022. Consistent with prior quarters’, adjustments to distributable earnings included adding back to gap net income, the CECL reserves, stock-based compensation and depreciation and amortization.

Our book value as of December 31st was $14.86 per common share compared with $15.23 as of September 30. The sequential decline in book value was attributable to the $0.29 per share special dividend declared in Q4 and paid in January and the $0.14 fourth quarter CECL provision. Operator, we’re now ready to take questions.

Operator: Thank you. Our first question comes from Aaron Hecht with JMP Securities. You may proceed.

Aaron Hecht: Hey, guys. Thanks for taking my questions. You highlighted the multiple pressures that are impacting the industry, whether that be regulatory or product pricing or the availability capital, and I think those concerns have been priced into your stock here for quite a while. So, how would you describe to investors just the health of your borrower base, your pool of investments? Anything to give more comfort or to understand the underwriting better because the performance of the portfolio has been really strong to date.

John Mazarakis: Yeah. I think Aaron, obviously, we have those two issues in the space, which is the capital that you’re describing and the price pressures, declining pricing environment is never good. I think our portfolio is very robust as you will see — kind of like I mentioned, we’ve committed to $0.47 a share per quarter, and we’re also committed to distributing 90% to 100%. We do want to reserve that special dividend in the end just to be conservative. But our approach is long-term. We’re not here for this year or this quarter. We’re here to deliver like solid returns for the next five years. Having said that, we do see isolated price compression in PA, maybe a little bit in Michigan. But we — again, in our underwriting is based on two things.

On the retail side, we’re focused on dollar per square foot, and we try to target over $3,000 per square foot. If we find a dispensary over $3,000 per square foot in California, and I say that all the time, we will fund that dispensary and we will fund it based on the parameters that we fund real estate on the retail side. And conversely, on the cultivation side, if we have a cultivator that has 60% to 70% gross margin, it doesn’t really matter what the selling price is, we will fund that cultivator. Now that cultivator is very hard to find in states like California, Washington State or Oregon. But we happen to be associated with a cultivator in Michigan that has those metrics. So, it all depends. Generally the portfolio is performing very well and we don’t foresee any issues.

Aaron Hecht: Gotcha. There were a couple loans that I think you took reserves on this quarter. Any kind of insight there into what caused that were there moved within the CECL ready for certain loans, and what’s the driver that? And I guess secondly, if you had to look at any of those buckets we talked about on the risk side were the regulatory product pricing, availability capital, what — which one of those is the most problematic, or carries is the most risk, do you think for your portfolio in 2023?

John Mazarakis: I’m going to take the first question first. We just want to be conservative. As you see, our competitors are reserving a lot more than we are. But we don’t want to head — we don’t want to take any unnecessary risk. We want to incrementally price or value our assets based on third-party valuations. And we just want to be respectful to the headwinds that not just the cannabis space is exhibiting, but also the broader economy. Interest rates will continue to go up as we know and maybe a little more aggressively than everybody anticipated. So, we’re just trying to take it one step at a time, evaluate on a daily basis our portfolio. And what you see with respect to CECL is just an outcome, and a culmination of multiple factors including third-party evaluations. So, I — the second part of the question I think is a little more difficult to sort of quantify. What — I guess your question is, what are we worried about the most?

Aaron Hecht: Yeah.

John Mazarakis: We would like to see isolated transition from medical to recreational sales, adult use in certain markets. And the faster that happens, obviously, the better our position, the longer it takes, the more the concern and the risk. And those states would be Ohio, PA, the states are medical. They’re very conservative, very limited in license number, number of licenses. So that would be probably something we would like to see change. The SAFE Banking Act is a secondary concern for us. And then I would say a tertiary concern is how much higher the interest rates will rise. If the interest rates rise another 200 basis points, obviously we got — we’ve got a broader sort of bearish environment beyond cannabis that we’re going to have to deal with. Disposable income will crash, that’s just going to reverberate throughout the economies. So, we’re just trying to prepare and balance all these outcomes.

Aaron Hecht: Gotcha. Appreciate the responses, John.

John Mazarakis: Anytime. Thank you, Aaron.

Operator: Thank you. Our next question comes from Gaurav Mehta with EF Hutton. You may proceed.

Gaurav Mehta: Yeah. Thanks. Good morning. I wanted to maybe ask you about some of the headwinds that you talked about. And in that context, how should we think about loan deployment volume that you guys might see in 2023?

Phil Silveran: So, right now, in terms of the next quarter or quarter one and Q2, we’re planning between $20 million and $30 million. And again, I think the key for us from a capital perspective is to continue to work on building to grow the revolver. And that’s really where we expect the incremental growth to come from.

Gaurav Mehta: So $20 million to $30 million in gross or net originations?

Phil Silveran: $20 million to $30 million, that’s right.

Gaurav Mehta: Okay. And I guess, in terms of expanding credit line, how’s your conversation going with your lending partners, and do you expect any expansion this year?

Anthony Cappell: Hey, Gaurav. Yes. I mean, we’re continually out there in the market. We’re speaking with banks on a regular basis and we expect to be able to exercise the full accordion up to $125 million by the end of this year.

Gaurav Mehta: Okay. Thank you. That’s all I had.

Operator: Thank you. We’ll go to Mark Smith of Lake Street. You may proceed.

Mark Smith: Hi, guys. First off, just wanted to talk a little bit about geographies. You talked about some of the states that you’re more optimistic about. Maybe any call outs on states that currently maybe give you a little more stress than others where you’re currently operating?

John Mazarakis: I was actually — when I referred to PA, it was actually the main state that we are concerned with. In terms of states that we’re optimistic that I haven’t mentioned, Maryland. We’re extremely optimistic. We were actually growing our presence in Maryland and Missouri. Missouri has exceeded every expectation.

Mark Smith: Okay.

John Mazarakis: And again, with respect to states like Pennsylvania and Ohio, this goes back to our strategy from the beginning. These are still medical states. There has been some compression, but having that transition to adult use still has — is to come. So that really is a in terms of overall value.

Mark Smith: Okay. And then similarly, as you guys think about the pipeline, what maybe gives you some confidence in being able to continue to originate new loans as you guys look at the pipeline?

John Mazarakis: Yeah. I mean, obviously, you’ve seen a lot of other reports of going around. From a supply and demand perspective, there is significantly more demand than supply of capital. So, as far as new loans, it is — we have the pick of a litter, and ultimately can maximize our returns on a risk adjusted basis because there’s just not that much competition out there.

Mark Smith: Okay. And as you guys look at the pipeline, any breakdown or thoughts on existing states where you operate versus kind of new states, either new to you or new states, regulatory wise coming online, like Minnesota that you’re talking about. As you think about the pipeline, what’s kind of the breakdown of new states versus where you currently operate?

John Mazarakis: In term — there are two ways, Mark, that you can define the term new states, right? You can have states that are currently listed, that have no presence of medical or adult use markets. And those are harder to identify. Who knows, I don’t have a crystal ball. In terms of medical state that will convert to adult use, that would be my guess Minnesota would be high on the list to convert because Minnesota is — has turned democratic both on the senate side and the house side, which is an unusual phenomena. It hasn’t happened in several decades. So, that is the one state that kind of stands out. In terms of others, I would just be guessing. Obviously, Maryland is already wrecked. Everyone is saying that adult use sales will commence July 1st.

But that has not been confirmed yet. And Missouri has had one complete full month, which exceeded everyone’s expectations. I think, Missouri has gone up once the transition occurred somewhere in the ballpark of two to three x of top line retail revenue in one month, month over month.

Mark Smith: Okay.

John Mazarakis: They exceeded $100 million in sales the first month that they were open for business.

Mark Smith: Great. Thank you guys.

John Mazarakis: Thank you.

End of Q&A:

Operator: Thank you. That concludes our Q&A session today. Thank you for joining.

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CHICAGO ATLANTIC REAL ESTATE FINANCE INC

Q4 2022

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