CHICAGO ATLANTIC REAL ESTATE FINANCE, INC. FORWARD-LOOKING STATEMENTS
Some of the statements contained in this quarterly report constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and we intend such statements to be covered by the safe harbor provisions contained therein. Forward-looking statements relate to future events or the future performance or financial condition ofChicago Atlantic Real Estate Finance, Inc. (the "Company," "we," "us," and "our"). The information contained in this section should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. This description contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the results discussed in the forward-looking statements due to the factors set forth in this quarterly report and in "Risk Factors" in our annual report on Form 10-K filed with theSecurities and Exchange Commission (the "SEC") and in Part II, Item 1A of this quarterly report on Form 10-Q, as such risks may by updated, amended, or superseded from time to time by subsequent reports we file with theSEC . The forward-looking statements contained in this report involve a number of risks and uncertainties, including statements concerning: ? our future operating results and projected operating results;
? the ability of our Manager to locate suitable loan opportunities for us,
monitor and actively manage our loan portfolio, and implement our investment
strategy;
? the allocation of loan opportunities to us by our Manager;
? the impact of inflation on our operating results;
? actions and initiatives of the federal or state governments and changes to
government policies related to cannabis and the execution and impact of these
actions, initiatives, and policies, including the fact that cannabis remains
illegal under federal law;
? the estimated growth in and evolving market dynamics of the cannabis market;
? the demand for cannabis cultivation and processing facilities; ? shifts in public opinion regarding cannabis;
? the state of the
? economic trends and economic recoveries; ? the amount and timing of our cash flows, if any, from our loans; ? our ability to obtain and maintain financing arrangements; ? our expected leverage; ? changes in the value of our loans; ? our expected investment and underwriting process; ? rates of default or decreased recovery rates on our loans;
? the degree to which any interest rate or other hedging strategies may or may
not protect us from interest rate volatility;
20
? changes in interest rates and impacts of such changes on our results of
operations, cash flows, and the market value of our loans;
? interest rate mismatches between our loans and our borrowings used to fund
such loans;
? the departure of any of the executive officers or key personnel supporting and
assisting us from our Manager or its affiliates;
? impact of and changes in governmental regulations, tax law and rates,
accounting guidance, and similar matters;
? our ability to maintain our exclusion or exemption from registration under the
Investment Company Act;
? our ability to qualify and maintain our qualification as a real estate
investment trust ("REIT") for U.S. federal income tax purposes;
? estimates relating to our ability to make distributions to our stockholders in
the future;
? our understanding of our competition;
? market trends in our industry, interest rates, real estate values, the
securities markets or the general economy; and
? any of the other risks, uncertainties and other factors we identify in our
annual report on Form 10-K or this quarterly report on Form 10-Q.
Available Information
We routinely post important information for investors on our website,
www.chicagoatlantic.com. We intend to use this webpage as a means of disclosing
material information, for complying with our disclosure obligations under
Regulation FD and to post and update investor presentations and similar
materials on a regular basis. We encourage investors, analysts, the media, and
others interested in us to monitor the Investments section of our website, in
addition to following our press releases, SEC filings, public conference calls,
presentations, webcasts and other information we post from time to time on our
website. To sign-up for email-notifications, please visit "Contact" section of
our website under "Join Our Mailing List" and enter the required information to
enable notifications.
Overview
We are a commercial real estate finance company. Our primary investment
objective is to provide attractive, risk-adjusted returns for stockholders over
time primarily through consistent current income dividends and other
distributions and secondarily through capital appreciation. We intend to achieve
this objective by originating, structuring and investing in first mortgage loans
and alternative structured financings secured by commercial real estate
properties. Our current portfolio is comprised primarily of senior loans to
state-licensed operators in the cannabis industry, secured by real estate,
equipment, receivables, licenses or other assets of the borrowers to the extent
permitted by applicable laws and regulations governing such borrowers. We intend
to grow the size of our portfolio by continuing the track record of our business
and the business conducted by our Manager and its affiliates by making loans to
leading operators and property owners in the cannabis industry. There is no
assurance that we will achieve our investment objective.
Our Manager and its affiliates seek to originate real estate loans between $5
million and $200 million , generally with one- to five-year terms and
amortization when terms exceed three years. We generally act as co-lenders in
such transactions and intend to hold up to $30 million of the aggregate loan
amount, with the remainder to be held by affiliates or third party co-investors.
We may revise such concentration limits from time to time as our loan portfolio
grows. Other investment vehicles managed by our Manager or affiliates of our
Manager may co-invest with us or hold positions in a loan where we have also
invested, including by means of splitting commitments, participating in loans or
other means of syndicating loans. We will not engage in a co-investment
transaction with an affiliate where the affiliate has a senior position to the
loan held by us. To the extent that an affiliate provides financing to one of
our borrowers, such loans will be working capital loans or loans that are
subordinate to our loans. We may also serve as co-lenders in loans originated by
third parties and, in the future, we may also acquire loans or loan
participations. Loans that have one to two year maturities are generally
interest only loans.
21
Our loans are secured by real estate and, in addition, when lending to
owner-operators in the cannabis industry, other collateral, such as equipment,
receivables, licenses or other assets of the borrowers to the extent permitted
by applicable laws and regulations. In addition, we seek to impose strict loan
covenants and seek personal or corporate guarantees for additional protection.
As of March 31, 2023 and December 31, 2022 , 50.0% and 13.6%, respectively, of
the loans held in our portfolio are backed by personal or corporate guarantees.
We aim to maintain a portfolio diversified across jurisdictions and across
verticals, including cultivators, processors, dispensaries, as well as ancillary
businesses. In addition, we may invest in borrowers that have equity securities
that are publicly traded on the Canadian Stock Exchange ("CSE") in Canada and/or
over-the-counter in the United States .
As of March 31, 2023 , our portfolio is comprised primarily of first mortgages to
established multi-state or single-state cannabis operators or property owners.
We consider cannabis operators to be established if they are state-licensed and
are deemed to be operational and in good standing by the applicable state
regulator. We do not own any stock, warrants to purchase stock or other forms of
equity in any of our portfolio companies that are involved in the cannabis
industry, and we will not take stock, warrants or equity in such issuers until
permitted by applicable laws and regulations, including U.S. federal laws and
regulations.
We are an externally managedMaryland corporation that elected to be taxed as a REIT under Section 856 of the Code, commencing with our taxable year endedDecember 31, 2021 . We believe that our method of operation will enable us to continue to qualify as a REIT. However, no assurances can be given that our beliefs or expectations will be fulfilled, since qualification as a REIT depends on us continuing to satisfy numerous asset, income, and distribution tests, which in turn depend, in part, on our operating results. We also intend to operate our business in a manner that will permit us and our subsidiaries to maintain one or more exclusions or exemptions from registration under the Investment Company Act. Revenues
We operate as one operating segment and are primarily focused on financing senior secured loans and other types of loans for established state-licensed operators in the cannabis industry. These loans are generally held for investment and are substantially secured by real estate, equipment, licenses and other assets of the borrowers to the extent permitted by the applicable laws and the regulations governing such borrowers. We generate revenue primarily in the form of interest income on loans. As ofMarch 31, 2023 andDecember 31, 2022 , approximately 88.0% and 83.1%, respectively, of our portfolio was comprised of floating rate loans, and 12.0% and 16.9% of our portfolio was comprised of fixed rate loans, respectively. The floating rate loans described above are variable based upon the Prime Rate plus an applicable margin, and in many cases, a Prime Rate floor.
The Prime Rate during the three months ended
Effective Date Rate(1)March 23, 2023 8.00 %February 2, 2023 7.75 %December 15, 2022 7.50 %November 3, 2022 7.00 %September 22, 2022 6.25 %July 28, 2022 5.50 %June 16, 2022 4.75 %May 5, 2022 4.00 %March 17, 2022 3.50 %March 15, 2020 3.25 %
(1) Rate obtained from the
22
Interest on our loans is generally payable monthly. The principal amount of our
loans and any accrued but unpaid interest thereon generally become due at the
applicable maturity date. In some cases, our interest income includes a
paid-in-kind ("PIK") component for a portion of the total interest. The PIK
interest, computed at the contractual rate specified in each applicable loan
agreement, is accrued in accordance with the terms of such loan agreement and
capitalized to the principal balance of the loan and recorded as interest
income. The PIK interest added to the principal balance is typically amortized
and paid in accordance with the applicable loan agreement. In cases where the
loans do not amortize, the PIK interest is collected upon repayment of the
outstanding principal. We also generate revenue from original issue discounts
("OID"), which is also recognized as interest income from loans over the initial
term of the applicable loans. Delayed draw loans may earn interest or unused
fees on the undrawn portion of the loan, which is recognized as interest income
in the period earned. Other fees, including prepayment fees and exit fees, are
also recognized as interest income when received. Any such fees will be
generated in connection with our loans and recognized as earned in accordance
with generally accepted accounting principles ("GAAP").
Expenses
Our primary operating expense is the payment of Base Management Fees and
Incentive Compensation under our Management Agreement with our Manager and the
allocable portion of overhead and other expenses paid or incurred on our behalf,
including reimbursing our Manager for a certain portion of the compensation of
certain personnel of our Manager who assist in the management of our affairs,
excepting only those expenses that are specifically the responsibility of our
Manager pursuant to our Management Agreement. We bear all other costs and
expenses of our operations and transactions, including (without limitation) fees
and expenses relating to:
? organizational and offering expenses;
? quarterly valuation expenses;
? fees payable to third parties relating to, or associated with, making loans
and valuing loans (including third-party valuation firms);
? fees and expenses associated with investor relations and marketing efforts
(including attendance at investment conferences and similar events);
? accounting and audit fees and expenses from our independent registered public
accounting firm;
? federal and state registration fees;
? any exchange listing fees;
? federal, state and local taxes;
? independent directors' fees and expenses;
? brokerage commissions;
? costs of proxy statements, stockholders' reports and notices; and
? costs of preparing government filings, including periodic and current reports
with the SEC .
23
Income Taxes
We are aMaryland corporation that elected to be taxed as a REIT under the Code, commencing with our taxable period endedDecember 31, 2021 . We believe that our method of operation will enable us to continue to qualify as a REIT. However, no assurances can be given that our beliefs or expectations will be fulfilled, since qualification as a REIT depends on us satisfying numerous asset, income and distribution tests which depends, in part, on our operating results. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute annually to our stockholders at least 90% of our REIT taxable income prior to the deduction for dividends paid. To the extent that we distribute less than 100% of our REIT taxable income in any tax year (taking into account any distributions made in a subsequent tax year under Sections 857(b)(9) or 858 of the Code), we will pay tax at regular corporate rates on that undistributed portion. Furthermore, if we distribute less than the sum of 1) 85% of our ordinary income for the calendar year, 2) 95% of our capital gain net income for the calendar year, and 3) any undistributed shortfall from our prior calendar year (the "Required Distribution") to our stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are required to pay a non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed. The 90% distribution requirement does not require the distribution of net capital gains. However, if we elect to retain any of our net capital gain for any tax year, we must notify our stockholders and pay tax at regular corporate rates on the retained net capital gain. Our stockholders must include their proportionate share of the retained net capital gain in their taxable income for the tax year, and they are deemed to have paid the REIT's tax on their proportionate share of the retained capital gain. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax. If it is determined that our estimated current year taxable income will be in excess of estimated dividend distributions (including capital gain dividend) for the current year from such income, we will accrue excise tax on estimated excess taxable income as such taxable income is earned. The annual expense is calculated in accordance with applicable tax regulations. Excise tax expense, if any, is included in the line item, income tax expense. For the three months endedMarch 31, 2023 and the year endedDecember 31, 2022 , we did not incur excise tax expense.Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 740 - Income Taxes ("ASC 740"), prescribes a recognition threshold and measurement attribute for the consolidated financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have analyzed our various federal and state filing positions and believe that our income tax filing positions and deductions are well documented and supported as ofMarch 31, 2023 . Based on our evaluation, there is no reserve for any uncertain income tax positions. Accrued interest and penalties, if any, are included within other liabilities in the consolidated balance sheets.
Factors Impacting our Operating Results
The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, commercial real estate debt and other financial assets in the marketplace. Our net interest income, which includes the accretion and amortization of OID, is recognized based on the contractual rate and the outstanding principal balance of the loans we originate. Interest rates will vary according to the type of loan, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, some of which cannot be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers.
Changes in Market Interest Rates and Effect on Net Interest Income
Interest rates are highly sensitive to many factors, including fiscal and
monetary policies and domestic and international economic and political
considerations, as well as other factors beyond our control. We will be subject
to interest rate risk in connection with our assets and our related financing
obligations.
24
Our operating results will depend in large part on differences between the income earned on our assets and our cost of borrowing. The cost of our borrowings generally will be based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase (a) while the yields earned on our leveraged fixed-rate loan assets will remain static, and (b) at a faster pace than the yields earned on our leveraged floating-rate loan assets, which could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our target investments. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations. Interest Rate Cap Risk
We currently own and intend to acquire in the future floating-rate assets. These are assets in which the loans may be subject to periodic and lifetime interest rate caps and floors, which limit the amount by which the asset's interest yield may change during any given period. However, our borrowing costs pursuant to our financing agreements may not be subject to similar restrictions. Therefore, in a period of increasing interest rates, interest rate costs on our borrowings could increase without limitation by caps, while the interest-rate yields on our floating-rate assets would effectively be limited. In addition, floating-rate assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our receipt of cash income from such assets in an amount that is less than the amount that we would need to pay the interest cost on our related borrowings. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations. As ofMarch 31, 2023 , all of our floating rate loans have interest rate floors, and one loan is subject to an interest rate cap. Interest Rate Mismatch Risk
We may fund a portion of our origination of loans, or of loans that we may in
the future acquire, with borrowings that are based on the Prime Rate or a
similar measure, while the interest rates on these assets may be fixed or
indexed to the Prime Rate or another index rate. Accordingly, any increase in
the Prime Rate will generally result in an increase in our borrowing costs that
would not be matched by fixed-rate interest earnings and may not be matched by a
corresponding increase in floating-rate interest earnings. Any such interest
rate mismatch could adversely affect our profitability, which may negatively
impact distributions to our stockholders.
Our analysis of risks is based on our Manager's experience, estimates, models
and assumptions. These analyses rely on models which utilize estimates of fair
value and interest rate sensitivity. Actual economic conditions or
implementation of decisions by our Manager and our management may produce
results that differ significantly from the estimates and assumptions used in our
models and the projected results.
Market Conditions
We believe that favorable market conditions, including an imbalance in supply
and demand of credit to cannabis operating companies, have provided attractive
opportunities for non-bank lenders, such as us, to finance commercial real
estate loans and other loans that exhibit strong fundamentals but also require
more customized financing structures and loan products than regulated financial
institutions can presently provide. Additionally, to the extent that additional
states legalize cannabis, our addressable market will increase. We intend to
continue our track record of capitalizing on these opportunities and growing the
size of our portfolio.
25
Developments During the First Quarter of 2023
Updates to Our Loan Portfolio during the First Quarter of 2023
OnJanuary 12, 2023 , we advanced approximately$0.2 million in aggregate principal on an existing credit facility to one borrower. OnJanuary 24, 2023 , we refinanced and closed one credit facility with an existing borrower, which resulted in a paydown of$18.3 million in aggregate principal. OnJanuary 24, 2023 , we also purchased a senior secured loan from an affiliate under common control. The purchase price of approximately$19.0 million was approved by the Audit Committee of the Board. The fair value approximated the carrying value of the loan plus accrued and unpaid interest throughJanuary 24, 2023 . OnJanuary 24, 2023 , we also closed one credit facility with a new borrower, which had an aggregate commitment of$11.3 million , which was fully funded at closing. OnMarch 6, 2023 , we advanced approximately$0.7 million in aggregate principal on an existing credit facility to one borrower. OnMarch 27, 2023 , we closed one credit facility with a new borrower, which has an aggregate commitment of approximately$2.0 million . OnMarch 31, 2023 , we close one credit facility with a new borrower, which has an aggregate commitment of approximately$1.0 million . OnMarch 3, 2023 , an existing borrower paid down approximately$6.4 million in aggregate principal. We received a prepayment premium and a success fee of approximately$0.3 million and$0.1 million , respectively. OnMarch 30, 2023 , an existing borrower repaid its loan in full in an amount of approximately$19.0 million in aggregate principal. The loan was comprised of a single tranche with an original maturity date ofOctober 31, 2024 . We received a make-whole fee of approximately$1.0 million . OnMarch 31, 2023 , we decided to and completed the sale of a secured loan to an affiliate under common control. The selling price of approximately$13.7 million was approved by the audit committee of the Board. The fair value approximated the carrying value of the loan plus accrued and unpaid interest throughMarch 31, 2023 .
Subsequent Updates to Our Loan Portfolio
During the period from
Dividends Declared Per Share
During the three months endedMarch 31, 2023 , we declared an ordinary cash dividend of$0.47 per share of our common stock, relating to the first quarter of 2023, which was paid onApril 14, 2023 to stockholders of record as of the close of business onMarch 31, 2023 . The total amount of the cash dividend payment was approximately$8.5 million .
The payment of these dividends is not indicative of our ability to pay such dividends in the future.
Results of Operations
Comparison of the three months ended
For the
three months For the
ended three months ended Variance
March 31, March 31,
2023 2022 Amount %
Revenues
Interest income $ 16,527,304 $ 9,833,053 $ 6,694,251 68.1
Interest expense (1,618,296 ) (72,268 ) (1,546,028 ) **
Net interest income 14,909,008 9,760,785 5,148,223 52.7
ExpensesManagement and incentive fees, net 2,138,005 671,505 1,466,500 ** General and administrative expense 1,274,825
556,142 718,683 ** Professional fees 569,375 556,902 12,473 2.2 Stock based compensation 138,335 120,940 17,395 14.4
Provision for current expected credit losses 96,119 51,344 44,775 87.2 Total expenses$ 4,216,659 $ 1,956,833$ 2,259,826 ** Net Income before income taxes 10,692,349
7,803,952 2,888,397 37.0 Income tax expense - - - ** Net Income$ 10,692,349 $ 7,803,952$ 2,888,397 37.0
** Percentage over 100% or prior period amount was zero.
26
? Interest income increased by approximately
quarter ended
The increase was driven primarily by an increase in the Prime Rate from 3.50%
as of
88.0% of the Company's loans, which bear a floating rate as well as new
fundings of approximately $278.1 million in loan principal.
? Net interest income increased approximately
comparative period. The increase was primarily attributable to the increase in
interest income described above, and was offset by a corresponding increase in
interest expense. During the first quarter of 2023, we borrowed an additional
the Prime Rate plus an applicable margin and was subject to the Prime Rate
increases during the quarter.
? We incurred base management and incentive fees payable to our Manager of
approximately
compared to approximately
2022. The increase was primarily attributable to greater assets under
management, which was offset by less origination fee offsets in the three
months ended
in weighted average equity as defined by the Management Agreement for the
comparable period.
? General and administrative expenses and professional fees increased by
approximately
compared to the three months ended
due to an increase in overhead reimbursements for costs incurred by the
Manager on behalf of the Company, offset in part by a decrease in audit,
legal, investor relations and third-party consulting fees.
? Provision for current expected credit losses increased in the three months
ended
primarily due to declines in risk ratings (discussed below) from
2022 to
issues, but rather, are primarily due to our quarterly re-evaluations of
overall current macroeconomic conditions affecting our borrowers. As interest
rates have risen over the year ended
operations has been reduced. The current expected credit loss reserve
represents 126 basis points of our aggregate loan commitments held at carrying
value of approximately
current expected credit loss reserve (contra-asset) related to outstanding
balances on loans held at carrying value of approximately
(ii) a liability for unfunded commitments of
on the unfunded portion of loan commitments over the full contractual period
over which we are exposed to credit risk through a current obligation to
extend credit. Management considered the likelihood that funding will occur,
and if funded, the expected credit loss on the funded portion. We continuously
evaluate the credit quality of each loan by assessing the risk factors of each
loan.
Loan Portfolio
As of March 31, 2023 and December 31, 2022 , our portfolio included 24 and 22
loans held for investment of approximately $312.2 million and $335.3 million ,
respectively. The aggregate originated commitment under these loans was
approximately $328.0 million and $351.4 million and outstanding principal was
approximately $320.2 million and $343.0 million as of March 31, 2023 and
December 31, 2022 , respectively. As of March 31, 2023 and December 31, 2022 , our
loan portfolio had a weighted-average yield-to-maturity internal rate of return
("YTM IRR") of 19.4% and 19.7%, respectively, and was substantially secured by
real estate and, with respect to certain of our loans, substantially all assets
of the borrowers and certain of their subsidiaries, including equipment,
receivables, and licenses. YTM IRR is calculated using various inputs, including
(i) cash and paid-in-kind ("PIK") interest, which is capitalized and added to
the outstanding principal balance of the applicable loan, (ii) original issue
discount ("OID"), (iii) amortization, (iv) unused fees, and (v) exit fees.
Certain of our loans have extension fees, which are not included in our YTM IRR
calculations, but may increase YTM IRR if such extension options are exercised
by borrowers.
27
As ofMarch 31, 2023 andDecember 31, 2022 , approximately 88.0% and 83.1%, respectively, of our portfolio was comprised of floating rate loans that pay interest at the Prime Rate plus an applicable margin and were subject to a Prime Rate floor. The Prime Rate was 3.25% for the period fromJanuary 1, 2022 throughMarch 16, 2022 , increased to 3.50% effectiveMarch 17, 2022 , increased to 4.00% effectiveMay 5, 2022 , increased to 4.75% effectiveJune 16, 2022 , increased to 5.50% effectiveJuly 28, 2022 , increased to 6.25% effectiveSeptember 22, 2022 , increased to 7.00% effectiveNovember 3, 2022 , increased to 7.50% effectiveDecember 15, 2022 , increased to 7.75% effectiveFebruary 2, 2023 , and increased again to 8.00% effectiveMarch 23, 2023 . The below summarizes our portfolio as ofMarch 31, 2023 : Initial Total Percent of Our Periodic YTM Funding Maturity Principal Carrying Loan Future Loan Date (1) Date (2) Commitment (3) Balance Value Portfolio Fundings Interest Rate (4) Payment(5) IRR (6) 1 10/27/2022 10/30/2026 30,000,000 30,000,000 29,195,836 9.2 % - P + 6.50%(7) I/O 16.8 % P + 6.65%(7)(8) Cash, 2 3/5/2021 12/31/2024 35,891,667 37,596,132 37,454,282 11.8 % - 4.25% PIK P&I 18.0 % 13.91% Cash(7), 2.59% 3 3/25/2021 11/29/2024 20,105,628 20,942,803 20,398,886 6.5 % - PIK(10) P&I 22.8 % 4 4/19/2021 12/31/2023 12,900,000 12,075,490 12,075,490 3.8 % - 18.72%(7)(9) P&I 24.5 % 5 4/19/2021 4/30/2025 3,500,000 2,666,000 2,666,000 0.8 % 834,000 P + 12.25%(7) P&I 22.8 % P + 9.00%(7) Cash, 12% 6 8/20/2021 2/20/2024 6,000,000 4,275,000 4,271,433 1.4 % 1,500,000 PIK P&I 21.1 % P + 6.00%(7) Cash, 2.5% 7 8/24/2021 6/30/2025 25,000,000 25,623,762 25,402,772 8.0 % - PIK P&I 18.1 % 8 9/1/2021 9/1/2024 9,500,000 10,535,399 10,445,335 3.3 % - 19.25% PIK P&I 25.8 % P + 10.75%(7) Cash, 9 9/3/2021 6/30/2024 15,000,000 16,013,359 16,013,359 5.1 % - 6.0% PIK P&I 19.0 % 10 9/20/2021 9/30/2024 470,411 235,205 235,205 0.1 % - 11.00% P&I 21.4 % P + 8.75%(7) Cash, 2% 11 9/30/2021 9/30/2024 32,000,000 32,809,285 32,272,326 10.2 % - PIK I/O 21.7 % 12 11/8/2021 10/31/2024 13,574,667 13,038,000 12,930,501 4.1 % - P + 9.25%(7) Cash P&I 19.7 % P + 6.00%(7) Cash, 1.5% 13 11/22/2021 11/1/2024 13,100,000 13,166,720 13,058,608 4.1 % - PIK I/O 18.5 % P + 12.25%(7) Cash, 14 12/27/2021 12/27/2026 5,000,000 5,194,514 5,194,514 1.6 % - 2.5% PIK P&I 23.5 % P + 7.50%(7) Cash, 5% 15 12/29/2021 12/29/2023 6,000,000 3,835,398 3,801,740 1.2 % 2,400,000 PIK I/O 26.9 % 16 12/30/2021 12/31/2024 13,000,000 7,050,000 7,006,176 2.2 % 5,500,000 P + 9.25%(7) I/O 22.5 % 17 1/18/2022 1/31/2025 15,000,000 15,000,000 14,768,664 4.7 % - P + 4.75%(7) P&I 14.1 % P + 6.00%(7) Cash, 5% 18 2/3/2022 2/28/2025 11,662,050 12,677,075 12,525,206 4.0 % - PIK P&I 21.5 % 19 3/11/2022 8/29/2025 20,000,000 20,637,961 20,567,900 6.5 % - 11.00% Cash, 3% PIK P&I 15.5 % 20 5/9/2022 5/30/2025 17,000,000 17,425,500 17,305,115 5.5 % - 11.00% Cash, 2% PIK P&I 14.7 % P + 8.50%(7) Cash, 3% 21 7/1/2022 6/30/2026 9,000,000 5,114,907 5,041,408 1.6 % 4,000,000 PIK P&I 26.4 % P + 5.75%(7) Cash, 1.4% 22 1/24/2023 1/24/2026 11,250,000 11,278,897 10,645,161 3.4 % - PIK P&I 19.9 % 23 3/27/2023 3/31/2026 2,000,000 2,000,000 1,950,227 0.6 % - P + 7.50%(7) P&I 18.3 % 24 3/31/2023 9/27/2026 1,000,000 1,000,000 1,000,000 0.3 % - P + 10.50%(7) P&I 21.2 % Subtotal 327,954,423 320,191,407 316,226,144 100.0 % 14,234,000 17.6% Wtd Average 19.4 %
(1) All loans originated prior to
entities at fair value plus accrued interest on or subsequent to
2021.
28
(2) Certain loans are subject to contractual extension options and may be
subject to performance based on other conditions as stipulated in the loan
agreement. Actual maturities may differ from contractual maturities stated
herein as certain borrowers may have the right to prepay with or without a
contractual prepayment penalty. The Company may also extend contractual
maturities and amend other terms of the loans in connection with loan
modifications.
(3) Total Commitment excludes future amounts to be advanced at sole discretion
of the lender.
(4) "P" = Prime Rate and depicts floating rate loans that pay interest at the
Prime Rate plus a specific percentage; "PIK" = paid in kind interest;subtotal represents weighted average interest rate. (5) P&I = principal and interest. I/O = interest only. P&I loans may include
interest only periods for a portion of the loan term. (6) Estimated YTM includes a variety of fees and features that affect the total
yield, which may include, but is not limited to, OID, exit fees, prepayment
fees, unused fees and contingent features. OID is recognized as a discount
to the funded loan principal and is accreted to income over the term of the
loan.
The estimated YTM calculations require management to make estimates and
assumptions, including, but not limited to, the timing and amounts of loan
draws on delayed draw loans, the timing and collectability of exit fees, the
probability and timing of prepayments and the probability of contingent
features occurring. For example, certain credit agreements contain
provisions pursuant to which certain PIK interest rates and fees earned by
us under such credit agreements will decrease upon the satisfaction of
certain specified criteria which we believe may improve the risk profile of
the applicable borrower. To be conservative, we have not assumed any
prepayment penalties or early payoffs in our estimated YTM calculation.
Estimated YTM is based on current management estimates and assumptions,
which may change. Actual results could differ from those estimates and
assumptions.
(7) This Loan is subject to Prime Rate floor.
(8) This Loan is subject to an interest rate cap.
(9) The aggregate loan commitment to Loan #4 includes a
which has a base interest rate of 15.00%, and a second advance of
million, which has an interest rate of 39.00%. The statistics presented
reflect the weighted average of the terms under both advances for the total
aggregate loan commitment.
(10) The aggregate loan commitment to Loan #3 includes a
advance, which has a base interest rate of 13.625%, 2.75% PIK and a second
advance of
The statistics presented reflect the weighted average of the terms under
both advances for the total aggregate loan commitment.
29
The following tables summarize our loans held for investment as of March 31,
2023 and December 31, 2022 :
As of March 31, 2023
Weighted
Average
Original Remaining
Outstanding Issue Carrying Life
Principal (1) Discount Value (1) (Years) (2)
Senior Term Loans $ 320,191,407 $ (3,965,263 ) $ 316,226,144 2.0Current expected credit loss reserve - - (4,051,934 ) Total loans held at carrying value, net$ 320,191,407 $ (3,965,263 ) $ 312,174,210 As of December 31, 2022 Weighted Average Original Remaining Outstanding Issue Carrying Life Principal (1) Discount Value (1) (Years) (2) Senior Term Loans$ 343,029,334 $ (3,755,796 ) $ 339,273,538 2.2
Current expected credit loss reserve - -
(3,940,939 )
Total loans held at carrying value, net
(1) The difference between the Carrying Value and the Outstanding Principal
amount of the loans consists of unaccreted original issue discount, deferred
loan fees and other upfront fees. Outstanding principal balance includes
capitalized PIK interest, if applicable.
(2) Weighted average remaining life is calculated based on the carrying value of
the loans as of March 31, 2023 and December 31, 2022 , respectively.
The following tables present changes in loans held for investment at carrying
value as of and for the three months ended
Current
Original Expected
Issue Credit Loss Carrying
Principal Discount Reserve Value (1)Balance at December 31, 2022$ 343,029,334 $ (3,755,796 ) $ (3,940,939 ) $ 335,332,599 New fundings 34,060,000 (1,118,340 ) - 32,941,660 Principal repayment of loans (45,754,443 ) - - (45,754,443 ) Accretion of original issue discount - 908,873
- 908,873
Sale of loans (13,399,712 ) - - (13,399,712 )
PIK Interest 2,256,228 - - 2,256,228Current expected credit loss reserve - - (110,995 ) (110,995 ) Balance at March 31, 2023$ 320,191,407 $ (3,965,263 )
$ (4,051,934 ) $ 312,174,210
(1) The difference between the Carrying Value and the Outstanding Principal
amount of the loans consists of unaccreted original issue discount, deferred
loan fees and loan origination costs. Outstanding principal balance includes
capitalized PIK interest, if applicable.
30
Current
Original Expected
Issue Credit Loss Carrying
Principal Discount Reserve Value (1)Balance at December 31, 2021$ 200,632,056 $ (3,647,490 ) $ (134,542 ) $ 196,850,024 New fundings 86,725,308 (1,128,415 ) - 85,596,893 Principal repayment of loans (5,619,201 ) - - (5,619,201 ) Accretion of original issue discount - 894,087 - 894,087 PIK Interest 970,569 - - 970,569 Provision for credit losses - - (48,296 ) (48,296 ) Balance at March 31, 2022$ 282,708,732 $ (3,881,818 )
$ (182,838 ) $ 278,644,076
(1) The difference between the Carrying Value and the Outstanding Principal
amount of the loans consists of unaccreted original issue discount, deferred
loan fees and loan origination costs. Outstanding principal balance includes
capitalized PIK interest, if applicable.
We may make modifications to loans, including loans that are in default. Loan
terms that may be modified include interest rates, required prepayments,
maturity dates, covenants, principal amounts and other loan terms. The terms and
conditions of each modification vary based on individual circumstances and will
be determined on a case by case basis. Our Manager monitors and evaluates each
of our loans held for investment and has maintained regular communications with
borrowers regarding potential impacts on our loans.
Non-GAAP Measures and Key Financial Measures and Indicators
As a commercial real estate finance company, we believe the key financial measures and indicators for our business are Distributable Earnings, Adjusted Distributable Earnings, book value per share, and dividends declared per share.
Distributable Earnings and Adjusted Distributable Earnings
In addition to using certain financial metrics prepared in accordance with GAAP
to evaluate our performance, we also use Distributable Earnings and Adjusted
Distributable Earnings to evaluate our performance. Each of Distributable
Earnings and Adjusted Distributable Earnings is a measure that is not prepared
in accordance with GAAP. We define Distributable Earnings as, for a specified
period, the net income (loss) computed in accordance with GAAP, excluding (i)
non-cash equity compensation expense, (ii) depreciation and amortization, (iii)
any unrealized gains, losses or other non-cash items recorded in net income
(loss) for the period; provided that Distributable Earnings does not exclude, in
the case of investments with a deferred interest feature (such as OID, debt
instruments with PIK interest and zero coupon securities), accrued income that
we have not yet received in cash, (iv) provision for current expected credit
losses and (v) one-time events pursuant to changes in GAAP and certain non-cash
charges, in each case after discussions between our Manager and our independent
directors and after approval by a majority of such independent directors. We
define Adjusted Distributable Earnings, for a specified period, as Distributable
Earnings excluding certain non-recurring organizational expenses (such as
one-time expenses related to our formation and start-up).
We believe providing Distributable Earnings and Adjusted Distributable Earnings
on a supplemental basis to our net income as determined in accordance with GAAP
is helpful to stockholders in assessing the overall performance of our business.
As a REIT, we are required to distribute at least 90% of our annual REIT taxable
income and to pay tax at regular corporate rates to the extent that we annually
distribute less than 100% of such taxable income. Given these requirements and
our belief that dividends are generally one of the principal reasons that
stockholders invest in our common stock, we generally intend to attempt to pay
dividends to our stockholders in an amount equal to our net taxable income, if
and to the extent authorized by our Board. Distributable Earnings is one of many
factors considered by our Board in authorizing dividends and, while not a direct
measure of net taxable income, over time, the measure can be considered a useful
indicator of our dividends.
31
Distributable Earnings and Adjusted Distributable Earnings should not be
considered as substitutes for GAAP net income. We caution readers that our
methodology for calculating Distributable Earnings and Adjusted Distributable
Earnings may differ from the methodologies employed by other REITs to calculate
the same or similar supplemental performance measures, and as a result, our
reported Distributable Earnings and Adjusted Distributable Earnings may not be
comparable to similar measures presented by other REITs.
The following table provides a reconciliation of GAAP net income to
Distributable Earnings and Adjusted Distributable Earnings (in thousands, except
per share data):
For the three For the three
months ended months ended
March 31, March 31,
2023 2022
Net Income $ 10,692,349 $ 7,803,952
Adjustments to net income
Non-cash equity compensation expense 138,335 120,940
Depreciation and amortization 167,304 72,268
Provision for current expected credit losses 96,119 51,343
Distributable Earnings $ 11,094,107 $ 8,048,503
Adjustments to Distributable Earnings
Adjusted Distributable Earnings 11,094,107 8,048,503 Basic weighted average shares of common stock outstanding (in shares)
17,879,444 17,641,090
Adjusted Distributable Earnings per Weighted Average Share $ 0.62 $ 0.46
Diluted weighted average shares of common stock outstanding
(in shares) 17,960,103 17,737,975 Adjusted Distributable Earnings per Weighted Average Share $ 0.62 $ 0.45
Book Value Per Share
The book value per share of our common stock as of
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders, and meet other general business needs. We use significant cash to invest in loans, repay principal and interest on our borrowings, make distributions to our stockholders, and fund our operations.
Our primary sources of cash generally consist of unused borrowing capacity under our financing sources, the net proceeds of future offerings of equity or debt securities, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating results. On a long-term basis, we expect that our primary sources of financing will be, to the extent available to us, through (a) credit facilities and (b) public and private offerings of our equity and debt securities. We may utilize other sources of financing to the extent available to us. As the cannabis industry continues to evolve and to the extent that additional states legalize cannabis, the demand for capital continues to increase as operators seek to enter and build out new markets. In the short-term, we expect the principal amount of the loans we originate to increase and that we will need to raise additional equity and/or debt financing to increase our liquidity. We expect to achieve this through recycling capital from loan paydowns, repayments, and sales of common stock related to our shelf registration statement. As ofMarch 31, 2023 andDecember 31, 2022 , all of our cash was unrestricted and totaled approximately$4.6 million and$5.7 million , respectively. We believe that our cash on hand, capacity available under our Revolving Loan, and cash flows from operations for the next twelve months will be sufficient to satisfy the operating requirements of our business through at least the next twelve months. The sources of financing for our target investments are described below. 32 Credit Facilities InMay 2021 , in connection with our acquisition of our wholly-owned financing subsidiary, CAL, we were assigned a secured revolving credit facility (the "Revolving Loan"). The Revolving Loan had an original aggregate borrowing base of up to$10,000,000 and bore interest, payable in cash in arrears, at a per annum rate equal to the greater of (x) Prime Rate plus 1.00% and (y) 4.75%. We incurred debt issuance costs of$100,000 related to the origination of the Revolving Loan, which were capitalized and are subsequently being amortized through maturity. The maturity date of the Revolving Loan was the earlier of (i)February 12, 2023 and (ii) the date on which the Revolving Loan is terminated pursuant to terms in the Revolving Loan Agreement. OnDecember 16, 2021 , CAL entered into an amended and restated Revolving Loan agreement (the "First Amendment and Restatement"). The First Amendment and Restatement increased the loan commitment from$10,000,000 to$45,000,000 and decreased the interest rate, from the greater of the (1) Prime Rate plus 1.00% and (2) 4.75% to the greater of (1) the Prime Rate plus the applicable margin and (2) 3.25%. The applicable margin is derived from a floating rate grid based upon the ratio of debt to equity of CAL and increases from 0% at a ratio of 0.25 to 1 to 1.25% at a ratio of 1.5 to 1. The First Amendment and Restatement also extended the maturity date fromFebruary 12, 2023 to the earlier of (i)December 16, 2023 and (ii) the date on which the Revolving Loan is terminated pursuant to the terms of the Revolving Loan agreement. We have the option to extend the initial term for an additional one-year term, provided no events of default exist and we provide the required notice of the extension pursuant to the First Amendment and Restatement. We incurred debt issuance costs of$859,500 related to the First Amendment and Restatement, which were capitalized and are subsequently being amortized through maturity. OnMay 12, 2022 , CAL entered into a second amended and restated Revolving Loan agreement (the "Second Amendment and Restatement") which provides for an increase in the aggregate commitment from$45 million to$65 million . No other material terms of the Revolving Loan were modified as a result of the execution of the Second Amendment and Restatement. We incurred debt issuance costs of$177,261 related to the Second Amendment and Restatement, which were capitalized and are subsequently amortized through maturity. OnNovember 7, 2022 , CAL entered into a third amended and restated Revolving Loan agreement (the "Third Amendment and Restatement") whereby we exercised the existing accordion feature of the Revolving Loan to increase the aggregate commitment by$27.5 million , from$65 million to$92.5 million . No other material terms of the Revolving Loan were modified as a result of the execution of the Third Amendment and Restatement. We incurred debt issuance costs of$323,779 related to the Third Amendment and Restatement, which were capitalized and are subsequently amortized through maturity. OnFebruary 27, 2023 , CAL entered into an amendment to the Third Amendment and Restatement (the "Amendment"). The Amendment extended the contractual maturity date of the Revolving Loan untilDecember 16, 2024 and we retained our option to extend the initial term for an additional one-year period, provided no events of default exist and we provide 365 days' notice of the extension pursuant to the Amendment. No other material terms of the Revolving Loan were modified as a result of the execution of the Amendment. As ofMarch 31, 2023 andDecember 31, 2022 , unamortized debt issuance costs related to the Revolving Loan, including all amendments and amendments and restatements thereto, as applicable, of$641,279 and$805,596 , respectively, are recorded in other receivables and assets, net on the consolidated balance sheets. The Revolving Loan incurs unused fees at a rate of 0.25% per annum which began onJuly 1, 2022 pursuant to the Second Amendment and Restatement. During the three months endedMarch 31, 2023 and 2022, we incurred approximately$10,000 and$0 in unused fees and approximately$1.4 million and$0 in interest expense, respectively, in connection with the Revolving Loan. In the future, we may use certain sources of financing to fund the origination or acquisition of our target investments, including credit facilities and other secured and unsecured forms of borrowing. These financings may be collateralized or non-collateralized and may involve one or more lenders. We expect that these facilities will typically have maturities ranging from two to five years and may accrue interest at either fixed or floating rates. The Revolving Loan provides for certain affirmative covenants, including requiring us to deliver financial information and any notices of default, and conducting business in the normal course. Additionally, the Company must comply with certain financial covenants including: (1) maximum capital expenditures of$150,000 , (2) maintaining a debt service coverage ratio greater than 1.35 to 1, and (3) maintaining a leverage ratio less than 1.50 to 1. As ofMarch 31, 2023 , we were in compliance with all financial covenants with respect to the Revolving Loan. 33 During the three months endedMarch 31, 2023 , we borrowed$37.5 million against the Revolving Loan, had$37.5 million outstanding, and$55.0 million available under the Revolving Loan. For the year endedDecember 31, 2022 , we borrowed$58.0 million against the Revolving Loan, had$58.0 million outstanding, and$34.5 million available under the Revolving Loan. For the three months endedMarch 31, 2022 , we did not borrow against the Revolving Loan and therefore had$0 outstanding and$45 million available under the Revolving Loan as of such date. Capital Markets
We may seek to raise further equity capital and issue debt securities in order to fund our future investments in loans.
Cash Flows
The following table sets forth changes in cash for the three months ended
For the
three months For the three
ended months ended
March 31 , March 31,
2023 2022
Net income $
10,692,349
(8,990,282 ) (4,768,320 )
Net cash provided by operating activities 1,702,067 3,035,632
Net cash provided by/(used) in investing activities 25,316,886 (77,175,374 )
Net cash used in financing activities (28,093,875 ) (30,606 )
Change in cash and cash equivalents $ (1,074,922 ) $ (74,170,348 ) Net Cash Provided by Operating Activities
For the three months endedMarch 31, 2023 and 2022, we reported "Net cash provided by operating activities" of$1.7 million and$3.0 million , respectively. Net cash flows provided by operating activities decreased$1.3 million , primarily attributable to an increase in provision for current expected credit losses of approximately$48 thousand , an increase in PIK interest of approximately$1.3 million , an increase in interest receivable of approximately$2.8 million , an increase in related party receivable of approximately$0.2 million , an increase in related party payable of approximately$0.1 million , an increase in management and incentive fees payable of approximately$0.9 million , and an increase in accounts payable and other accrued expenses of approximately$0.4 million , partially offset by an increase in net income of approximately$2.9 million , decrease in interest reserve of approximately$1.4 million , increase in debt issuance costs of approximately$0.1 million , and an increase in stock based compensation of approximately$17 thousand .
Net Cash Provided by/(Used) in Investing Activities
For the three months ended
For the three months endedMarch 31, 2023 , cash outflows primarily related to$32.9 million used for the origination and funding of loans held for investment, partially offset by$13.4 million received from the sales of loans and$44.9 million of cash received from the principal repayment of loans held for investment. For the three months endedMarch 31, 2022 , cash outflows primarily related to$82.8 million used for the origination and funding of loans held for investment, partially offset by$5.6 million of cash received from the principal repayment of loans held for investment. 34
For the three months ended
For the three months endedMarch 31, 2023 , cash inflows of approximately$6.0 million related to proceeds received from the registered direct offering and$28.5 million related to draw downs on our Revolving Loan, which were offset by approximately$49.0 million in repayments on our Revolving Loan,$13.5 million in dividends paid, approximately$3 thousand in debt issuance costs paid, and approximately$0.1 million in offering costs associated with the registered direct offering. For the three months endedMarch 31, 2022 , cash inflows primarily related to approximately$4.5 million received from the underwriters' partial exercise of their over-allotment option, offset by approximately$4.5 million in dividends paid, and approximately$24 thousand related to offering costs associated with our initial public offering. Leverage Policies
Although we are not required to maintain any particular leverage ratio, we expect to employ prudent amounts of leverage and, when appropriate, to use debt as a means of providing additional funds for the acquisition of loans, to refinance existing debt or for general corporate purposes. Leverage is primarily used to provide capital for forward commitments until additional equity is raised or additional medium- to long-term financing is arranged. This policy is subject to change by management and our Board. Dividends
We have elected to be taxed as a REIT forUnited States federal income tax purposes and, as such, anticipate annually distributing to our stockholders at least 90% of our REIT taxable income, prior to the deduction for dividends paid and our net capital gain. If we distribute less than 100% of our REIT taxable income in any tax year (taking into account any distributions made in a subsequent tax year under Sections 857(b)(9) or 858 of the Code), we will pay tax at regular corporate rates on that undistributed portion. Furthermore, if we distribute less than the sum of (i) 85% of our ordinary income for the calendar year, (ii) 95% of our capital gain net income for the calendar year and (iii) any Required Distribution to our stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are required to pay non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed. Any of these taxes would decrease cash available for distribution to our stockholders. The 90% distribution requirement does not require the distribution of net capital gains. However, if we elect to retain any of our net capital gain for any tax year, we must notify our stockholders and pay tax at regular corporate rates on the retained net capital gain. The stockholders must include their proportionate share of the retained net capital gain in their taxable income for the tax year, and they are deemed to have paid the REIT's tax on their proportionate share of the retained capital gain. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax. If we determine that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend distributions (including capital gains dividends) for the current year from such income, we accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned. To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may be required to fund distributions from working capital or through equity, equity-related or debt financings or, in certain circumstances, asset sales, as to which our ability to consummate transactions in a timely manner on favorable terms, or at all, cannot be assured, or we may make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of
debt
securities.
35
The following table summarizes the Company's dividends declared during the three
months ended
Common Share Taxable
Distribution Ordinary Return of Section 199A
Record Date Payment Date Amount Income Capital DividendsRegular cash dividend 3/31/2023 4/14/2023 $ 0.47$ 0.47 $ - $ 0.47 Total cash dividend $ 0.47$ 0.47 $ - $ 0.47 Common Share Taxable Distribution Ordinary Return of Section 199A Record Date Payment Date Amount Income Capital Dividends Regular cash dividend 3/31/2022 4/14/2022 $ 0.40$ 0.40 $ - $ 0.40 Total cash dividend $ 0.40$ 0.40 $ - $ 0.40 CECL Reserve In accordance with ASC 326, we record allowances for our loans held for investment. The allowances are deducted from the gross carrying amount of the assets to present the net carrying value of the amounts expected to be collected on such assets. The Company estimates its CECL Reserve using among other inputs, third-party valuations, and a third-party probability-weighted model that considers the likelihood of default and expected loss given default for each individual loan based on the risk profile for approximately three years after which we immediately revert to use of historical loss data. ASC 326 requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment. We consider multiple datapoints and methodologies that may include likelihood of default and expected loss given default for each individual loans, valuations derived from discount cash flows ("DCF"), and other inputs including the risk rating of the loan, how recently the loan was originated compared to the measurement date, and expected prepayment, if applicable. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, and off-balance sheet credit exposures such as unfunded loan commitments. We evaluate our loans on a collective (pool) basis by aggregating on the basis of similar risk characteristics as explained above. We make the judgment that loans to cannabis-related borrowers that are fully collateralized by real estate exhibit similar risk characteristics and are evaluated as a pool. Further, loans that have no real estate collateral, but are secured by other forms of collateral, including equity pledges of the borrower, and otherwise have similar characteristics as those collateralized by real estate are evaluated as a pool. All other loans are analyzed individually, either because they operate in a different industry, may have a different risk profile, or have maturities that extend beyond the forecast horizon for which we are able to derive reasonable and supportable forecasts.
Estimating the CECL Reserve also requires significant judgment with respect to various factors, including (i) the appropriate historical loan loss reference data, (ii) the expected timing of loan repayments, (iii) calibration of the likelihood of default to reflect the risk characteristics of our loan portfolio, and (iv) our current and future view of the macroeconomic environment. From time to time, we may consider loan-specific qualitative factors on certain loans to estimate our CECL Reserve, which may include (i) whether cash from the borrower's operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and (iii) the liquidation value of collateral. For loans where we have deemed the borrower/sponsor to be experiencing financial difficulty, we may elect to apply a practical expedient, in which the fair value of the underlying collateral is compared to the amortized cost of the loan in determining a CECL Reserve.
To estimate the historic loan losses relevant to our portfolio, we evaluate our historical loan performance, which includes zero realized loan losses since our inception of operations. Additionally, we analyzed our repayment history, noting we have limited "true" operating history, since the incorporation date ofMarch 30, 2021 . However, our Sponsor has had operations for the past two fiscal years and has made investments in similar loans that have similar characteristics, including interest rate, collateral coverage, guarantees, and prepayment/make whole provisions, which fall into the pools identified above. Given the similarity of the structuring of the credit agreements for the loans in our portfolio, management considered it appropriate to consider the past repayment history of loans originated by the Sponsor in determining the extent to which we should record a CECL Reserve. 36 In addition, we review each loan on a quarterly basis and evaluate the borrower's ability to pay the monthly interest and principal, if required, as well as the loan-to-value (LTV) ratio. In considering the potential current expected credit loss, the Manager primarily considers significant inputs to our forecasting methods, which include (i) key loan-specific inputs such as the value of the real estate collateral, liens on equity (including the equity in the entity that holds the state-issued license to cultivate, process, distribute, or retail cannabis), presence of personal or corporate guarantees, among other credit enhancements, LTV ratio, ratio type (fixed or floating) and IRR, loan-term, geographic location, and expected timing and amount of future loan fundings, (ii) performance against the underwritten business plan and our internal loan risk rating and (iii) a macro-economic forecast. Estimating the enterprise value of our borrowers in order to calculate LTV ratios is often a significant estimate. We rely primarily on comparable transactions to estimate enterprise value of our portfolio companies and supplement such analysis with a multiple-based approach to enterprise value to revenue multiples of publicly-traded comparable companies obtained fromS&P Capital IQ as of the quarter end, to which we apply a private company discount based on our current borrower profile. These estimates may change in future periods based on available future macro-economic data and might result in a material change in our future estimates of expected credit losses for our loan portfolio. Regarding real estate collateral, we generally cannot take the position of mortgagee-in-possession as long as the property is used by a cannabis operator, but we can request that the court appoint a receiver to manage and operate the subject real property until the foreclosure proceedings are completed. Additionally, while we cannot foreclose under state Uniform Commercial Code ("UCC") and take title or sell equity in a licensed cannabis business, a potential purchaser of a delinquent or defaulted loan could. In order to estimate the future expected loan losses relevant to our portfolio, we utilize historical market loan loss data obtained from a third-party database for commercial real estate loans, which we believe is a reasonably comparable and available data set to use as an input for our type of loans. We expect this dataset to be representative for future credit losses whilst considering that the cannabis industry is maturing, and consumer adoption, demand for production, and retail capacity are increasing akin to commercial real estate over time. For periods beyond the reasonable and supportable forecast period, we revert back to historical loss data. All of the above assumptions, although made with the most available information at the time of the estimate, are subjective and actual activity may not follow the estimated schedule. These assumptions impact the future balances that the loss rate will be applied to and as such impact our CECL Reserve. As we acquire new loans and our Manager monitors loan and borrower performance, these estimates will be revised each period. Risk Ratings
We assess the risk factors of each loan, and assigns a risk rating based on a variety of factors, including, without limitation, payment history, real estate collateral coverage, property type, geographic and local market dynamics, financial performance, enterprise value of the portfolio company, loan structure and exit strategy, and project sponsorship. This review is performed quarterly. Based on a 5-point scale, our loans are rated "1" through "5," from less risk to greater risk, which ratings are defined as follows: Rating Definition 1 Very low risk 2 Low risk 3 Moderate/average risk 4 High risk/potential for loss: a loan that has a risk of realizing a
principal loss 5 Impaired/loss likely: a loan that has a high risk of realizing principal
loss, has incurred principal loss or an impairment has been recorded
The risk ratings are primarily based on historical data and current conditions specific to each portfolio company, as well as consideration of future economic conditions and each borrower's estimated ability to meet debt service requirements. The risk ratings shown in the following table as ofMarch 31, 2023 andDecember 31, 2022 consider borrower specific credit history and performance and quarterly re-evaluation of overall current macroeconomic conditions affecting the borrowers. As interest rates have increased due to rising rates from theFederal Reserve Board , it has impacted borrowers' ability to service their debt obligations on a global scale. This decline in risk ratings had an effect on the level of the current expected credit loss reserve, though the loans continued to perform as expected. For approximately 80% of the portfolio, the fair value of the underlying real estate collateral exceeded the amounts outstanding under the loans as ofMarch 31, 2023 . The remaining approximately 20% of the portfolio, while not fully collateralized by real estate, was secured by other forms of collateral including equipment, receivables, licenses and/or other assets of the borrowers to the extent permitted by applicable laws and regulations governing such borrowers. 37 As ofMarch 31, 2023 andDecember 31, 2022 , the carrying value, excluding the CECL Reserve, of the Company's loans within each risk rating by year of origination is as follows: As of March 31, 2023 As of December 31, 2022 Risk Rating 2023 2022 2021 2020 2019 Total 2022 2021 2020 2019 Total 1 - - 235,205 - - 235,205 - 274,406 - - 274,406 2 13,595,388 124,333,205 71,790,767 - - 209,719,360 94,467,449 88,444,868 29,140,546 - 212,052,863 3 - 12,525,206 65,657,524 - - 78,182,730 30,415,113 83,131,444 - - 113,546,557 4 - - 28,088,849 - - 28,088,849 - 13,399,712 - - 13,399,712 5 - - - - - - - - - - - Total 13,595,388 136,858,411 165,772,345 - - 316,226,144 124,882,562 185,250,430 29,140,546 - 339,273,538
(1) Amounts are presented by loan origination year with subsequent advances shown
in the original year of origination.
Accounting Policies and Estimates
As ofMarch 31, 2023 , there were no significant changes in the application of our accounting policies or estimates from those presented in our annual report on Form 10-K. Refer to Note 2 to our consolidated financial statements for the three months endedMarch 31, 2023 , titled "Significant Accounting Policies" for information on recent accounting pronouncements.
© Edgar Online, source
