Overview

Chicago Atlantic Real Estate Finance, Inc. (REFI) is a commercial mortgage real estate investment trust (REIT) that primarily originates and invests in senior loans to state-licensed cannabis operators. The company’s primary investment objective is to provide attractive, risk-adjusted returns for stockholders through consistent current income dividends and capital appreciation.

REFI operates as an externally managed REIT and has elected to be taxed as a REIT for U.S. federal income tax purposes starting in 2021. The company’s loans are secured by real estate, equipment, receivables, licenses, and other assets of the borrowers to the extent permitted by applicable laws. REFI aims to maintain a diversified portfolio across jurisdictions and cannabis industry verticals.

Financial Performance

For the year ended December 31, 2024, REFI reported net income of $37.0 million, down 4% from $38.7 million in 2023. This decrease was primarily driven by a $0.8 million decline in gross interest income, which was partially offset by a $1.4 million increase in interest expense.

The decrease in interest income was due to a 100 basis point decline in the Prime Rate during 2024, which impacted the approximately 62.1% of the company’s portfolio that bears a floating rate. Additionally, REFI recognized $3.2 million in prepayment fees and accelerated original issue discounts in 2024, compared to $3.5 million in 2023. The weighted average yield-to-maturity internal rate of return (YTM IRR) on the portfolio decreased from 19.4% to 17.2% during the year.

The increase in interest expense was largely attributable to $1.0 million in interest on $50 million of new senior unsecured notes issued in Q4 2024, as well as a slight increase in average borrowings under the company’s revolving credit facility. Management and incentive fees decreased by $0.7 million, primarily due to lower incentive fees based on a $2.4 million decline in Core Earnings.

REFI’s provision for current expected credit losses decreased by $1.5 million year-over-year, driven by improved credit metrics and macroeconomic conditions. As of December 31, 2024, the company’s CECL reserve represented approximately 105 basis points of its aggregate loan commitments.

Loan Portfolio

As of December 31, 2024, REFI’s loan portfolio consisted of 30 loans held for investment with a total carrying value of $402.5 million, up from 27 loans with a carrying value of $353.6 million at the end of 2023. The outstanding principal balance increased from $355.7 million to $404.7 million over the same period.

The portfolio’s weighted average YTM IRR decreased from 19.4% to 17.2% during 2024, primarily due to the impact of the Prime Rate decline on floating-rate loans as well as certain loan modifications to de-risk the portfolio. As of December 31, 2024, the portfolio was comprised of 62.1% floating-rate loans and 37.9% fixed-rate loans.

REFI’s risk rating system classifies loans on a 5-point scale from “1” (very low risk) to “5” (impaired/loss likely). As of December 31, 2024, approximately 71.2% of the portfolio was rated “1” or “2”, up from 68.9% a year earlier, indicating an improvement in overall credit quality.

Liquidity and Capital Resources

REFI’s primary sources of liquidity include its $110 million revolving credit facility, which has an accordion feature to increase commitments up to $150 million, as well as future equity and debt offerings. As of December 31, 2024, the company had $55 million of availability under the revolving facility and $55 million outstanding.

In October 2024, REFI issued $50 million of senior unsecured notes with a 4-year term and a 9.0% fixed interest rate. The company used the proceeds to temporarily pay down the revolving facility and for general corporate purposes.

REFI has an effective shelf registration statement that allows it to sell up to $500 million of securities, including common stock, preferred stock, debt securities, warrants, and rights. In 2024, the company raised $38.4 million through its at-the-market (ATM) equity offering program. The company also completed a $6 million registered direct offering in 2023.

For the year ended December 31, 2024, REFI’s net cash provided by operating activities was $23.2 million, down from $28.4 million in 2023. This decrease was primarily attributable to lower net income, a decrease in the provision for credit losses, and changes in working capital. Net cash used in investing activities was $39.3 million, primarily for the origination and funding of new loans. Net cash provided by financing activities was $34.6 million, reflecting equity raises, borrowings, and dividend payments.

Dividends

As a REIT, REFI is required to distribute at least 90% of its annual REIT taxable income to shareholders. During 2024, the company declared regular quarterly dividends of $0.47 per share, as well as a special dividend of $0.18 per share, for a total of $2.06 per share for the year. This was down slightly from $2.17 per share in 2023.

Strengths and Weaknesses

Key strengths of REFI’s business model include:

• Specialized focus on the attractive and growing cannabis lending market
• Diversified portfolio across geographies and industry verticals
• Experienced management team with a track record of originating and managing commercial real estate loans
• Conservative underwriting with loans secured by real estate and other collateral
• Access to diversified capital sources, including credit facilities and the public markets

Potential weaknesses and risks include:

• Exposure to regulatory changes in the cannabis industry
• Concentration in a single industry sector
• Interest rate risk, as a majority of the portfolio is comprised of floating-rate loans
• Reliance on the performance and creditworthiness of its borrowers
• Competition from other lenders, both bank and non-bank, serving the cannabis industry

Outlook

The cannabis industry continues to evolve and expand as more states legalize marijuana, driving increased demand for capital. REFI is well-positioned to capitalize on these opportunities given its specialized expertise, diversified portfolio, and access to financing.

However, the company faces risks related to regulatory changes, interest rate movements, and potential credit deterioration among its borrowers. Maintaining a disciplined underwriting approach and prudent risk management will be critical to navigating these challenges and delivering consistent returns to shareholders.

Overall, REFI appears to be a well-managed commercial mortgage REIT with a unique focus on the cannabis industry. The company’s financial performance has been solid, though a decline in net income and dividends in 2024 bears watching. Continued execution on its investment strategy and effective capital allocation will be key to REFI’s long-term success.