Prepared remarks
Good day, and welcome to the Chicago Atlantic Real Estate Finance, Inc. First Quarter 2026 Earnings Conference Call. The operator provided instructions. Please note that this event is being recorded. I would now like to turn the conference over to Lisa Kampf. Please go ahead.
Thank you. Good morning. Welcome to the Chicago Atlantic Real Estate Finance Conference Call to review the company's results. On the call today will be Peter Sack, Co-Chief Executive Officer; David Kite, President and Chief Operating Officer; and Phil Silverman, 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 information filed with the SEC. A live audio webcast of this call is being made available today. For those who listen to the replay of this webcast, we remind you that the remarks made herein are as of today and will not be updated subsequent to this call. During the call, certain comments and statements we make may be deemed forward-looking statements within the meaning prescribed by securities laws, including statements related to the future performance of our portfolio, our pipeline of potential loans and other investments, future dividends and financing activities. All forward-looking statements represent Chicago Atlantic's judgment as of the date of this conference call and are subject to risks and uncertainties that can cause actual results to differ materially from our current expectations. Investors are urged to carefully review various disclosures made by the company, including the risks 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. Definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures are included in our filings with the SEC. I will now turn the call over to Peter Sack. Please go ahead.
Thank you, Lisa. Good morning, everyone. This quarter, Chicago Atlantic reported a quarter of consistent results against the backdrop of continuing concerns in the private credit market, the Fed pausing the interest rate easing cycle following three consecutive rate cuts in Q4 of last year and volatility caused by the Middle East conflict. This quarter's results reflect the strength and resilience of our business model. We are a leading capital provider in the cannabis ecosystem. Our experience in this industry provides us with the expertise, relationships and the ability to redeploy capital more quickly than the typical mortgage REIT. Our rigorous underwriting and stringent risk standards led by our cannabis-focused underwriting, real estate and analytics team ensures an acceptable risk reward. I continue to be optimistic about the current environment. The pipeline of cannabis opportunities remains strong and currently stands at $482 million, of which approximately $133 million of this pipeline is backed by real estate collateral. Given the recent medical rescheduling news in late April, I'd be remiss not to highlight the latest major federal initiative in policy setting for the cannabis industry. The Department of Justice announced on April 23 that it is rescheduling certain medical marijuana products to Schedule III from Schedule I. This is the most significant federal policy change in years and perhaps in the history of the industry. There are nuances to work out as we wait for a more definitive framework and how this policy will apply to existing individual state laws, and we expect these policy changes to impact each operator differently based on their medical market exposure. But after many years of delays, this is a tremendous step in the right direction. How we expect to immediately benefit from this order is predominantly through the elimination of the extra tax burden on cannabis companies resulting from Section 280E and retrospective relief on legacy tax liabilities that should improve operator cash flows and strengthen balance sheets, driving higher valuation multiples and improving the credit profiles of our borrowers. The federal order requires and sets up an expedited process for state licensed medical cannabis operators to register with the DEA and, in effect, legalizing state licensed medical cannabis on a federal level. Additional benefits from this would be lowering barriers to U.S. exchanges for which we have been an advocate. An administrative hearing is scheduled for June 29 to July 15. This hearing provides a pathway to reschedule cannabis more broadly, possibly rescheduling adult-use products. We will continue to be measured in our outlook for a positive outcome and not jump ahead in any conclusions. We believe Chicago Atlantic is well positioned to benefit from the initial order. And as I stated before, the success of our strategy is not dependent on any of these changes. We have remained conservative and underwrite every investment assuming no regulatory-driven credit improvements. Leading up to the June 29 hearing, we have begun forecasting for a range of outcomes from the rule-making process, but currently remain in a wait-and-see mode. Overall, REFI delivered consistent stable financial results for the first quarter of 2026 against an unstable macro environment. Our differentiated business model, lending to operators and property owners in the cannabis industry enables us to operate in a niche market with limited competition, favorable terms and delivering competitive yields. This year is proving to be a transformative time for the cannabis industry following the federal government's rescheduling of medical marijuana from Schedule I to Schedule III and the potential for broader policy shifts for cannabis later this year. We are encouraged by the validation of our business model and the potential impact of regulatory orders flowing through to REFI. I look forward to updating you on our progress throughout the rest of this exciting year. David will now speak to the portfolio in greater detail. David?
Thank you, Peter. As of March 31, our loan portfolio principal totaled approximately $414 million across 25 portfolio companies with a weighted average yield to maturity of 15.8% compared to 16.3% for the fourth quarter of 2025. Gross originations during the quarter were approximately $54 million of principal fundings, of which $16.2 million and $37.8 million were funded to new borrowers and existing borrowers, respectively. These were offset by approximately $52 million of repayments comprised of $3.3 million in scheduled amortization payments and $48.2 million from full and partial loan prepayments. As of March 31, 2026, approximately 10.7% of our portfolio is risk rated 4 or higher compared with 4.8% as of December 31, 2025. This risk rating shift primarily attributable to loan #36 being downgraded from a 3 to a 4 contributed to an increase in CECL reserves of approximately $3.8 million. As I mentioned on our last call, we made significant progress on loan #9 last quarter, funding in advance for the borrower to allow for accretive acquisitions. As of December 31, 2025, the loan was brought current. And as of March 31, we're pleased to announce that we've moved the loan back to accrual status after three consecutive months of timely payment and demonstration of sustained performance improvement, which we expect to lead to the ability to continue to meet debt service obligations. This is a prime example of how we utilize the operational and workout expertise amongst our team and the broader Chicago Atlantic platform, using creativity and deal management to drive successful turnaround efforts. As of March 31, 2026, approximately 4.8% of our portfolio is on nonaccrual status, a decrease from approximately 11.1% as of December 31, 2025, primarily relating to the restoration of loan #9 to accrual. As of March 31, 2026, our portfolio consisted of 35.2% fixed rate loans and 64.8% floating rate loans, 71.9% and 28.1% of floating rate loans are benchmarked to the prime rate and SOFR, respectively. With the current prime rate at 6.75%, 100% of our prime loans are at their floors. And in total, approximately only 4% of our loan principal is exposed to further rate declines across the total portfolio. Importantly, our floating rate loans are not exposed to interest rate caps, which, combined with our rate floor protections, provides a structural advantage in portfolio construction that compares favorably to most other mortgage REITs. Total leverage equaled 38% of book equity at March 31 compared to 32% as of December 31. As of March 31, we had $67.1 million outstanding on our senior secured revolving credit facility and $49.4 million outstanding on our unsecured term loan. As of today, we have approximately $59 million available on the senior credit facility and total liquidity, net of estimated liabilities of approximately $54 million. I'll now turn it over to Phil.
Thanks, David. Our net interest income of $13.1 million for the first quarter represented a $1.2 million or 8% decrease from $14.2 million during the fourth quarter of 2025. The decrease was primarily attributed to the fourth quarter collection of past due unaccrued interest on loan #9 totaling $1.7 million, which was recognized last quarter. Total interest expense, including noncash amortization of financing costs for the first quarter of 2026 was approximately $2 million, an increase from $1.8 million in the fourth quarter. The weighted average borrowings on our revolving loan increased to $48 million compared to $33.6 million during the fourth quarter. Our CECL reserve on our loans held for investment as of March 31, 2026, was approximately $8.7 million. On a relative size basis, our reserve for expected credit losses represents 2.1% of our outstanding principal of our loans held for investment. The reserve increased by approximately $3.8 million from the fourth quarter, primarily due to increases in LTV attributed to specific loans, primarily loan #4, #34, and loan #36. On a weighted average basis, our portfolio maintained strong real estate coverage of 1.2x. Distributable earnings per weighted average share on a basic and fully diluted basis were approximately $0.47 and $0.46 for the first quarter. And in April, we distributed the fourth quarter dividend of $0.47 per common share declared by our Board. Since inception, the company has distributed $8.94 per common share in dividends, which represents a yield on cost of approximately 11.8% when measured against our IPO price. Our book value per common share outstanding was $14.39 as of March 31, 2026, and there were approximately 21.5 million common shares outstanding on a fully diluted basis as of such date. During the subsequent period from April 1, 2026, through today, the company advanced new growth loan principal of approximately $15.8 million, comprised of $13.1 million advanced to a new borrower and $2.7 million to existing borrowers on delayed draw on existing credit facilities. Additionally, the company received a total of $14.3 million in loan repayments, comprised of $1.8 million of scheduled amortization and $12.5 million in early prepayments, which included the full repayment of loans #6 and #30. We expect to continue to maintain a dividend payout ratio based on our basic distributable earnings per share of 90% to 100% for the 2026 tax year. If our taxable income requires additional distributions in excess of the regular quarterly dividend to meet our taxable income requirements, we expect to meet that requirement with a special dividend in the fourth quarter. Operator, we're now ready to take questions.
Questions and answers
The operator provided instructions. The first question comes from Pablo Zuanic from Zuanic & Associates.
Thanks, Peter, for the commentary on the regulatory front and of course, the positive news that we've been receiving recently. I just want to start with loan #36. Obviously, #4 and #34 are Arizona loans, and we know that's a tough market for growers. You mentioned #4 and #34 are in accruals or part of the reserve. And in the case of #36, that's an Illinois loan, right? And it's a larger loan, $27 million. Whatever color you can provide more on that loan would be helpful. Arizona, I understand. Illinois, of course, we've seen other companies have issues there. But if you can just give more color on that particular loan #36 would be helpful, please. Especially in the context that it was issued in December 2024, which is not that long ago, I think.
Thank you. The Illinois market is experiencing consolidation on the retail front and I think it is experiencing increasing competition on cultivation. This one in particular has strong real estate coverage and is a vertically integrated operator. The reserving activity reflects our ordinary course evaluation of portfolio company performance and risk. The discussions with the borrower are very constructive. We expect that this company's performance can be improved and resolved in a constructive and collaborative manner. I'm hopeful that in the months ahead we'll find this reserving activity conservative. But regardless, this is part of our ongoing process to show reserving activity that reflects a conservative appreciation of performance in the portfolio.
On the same topic, Peter, can you give an update on loans #4 and #34?
These continue to evolve. I think it's too early to give specific updates, but they remain constructive relationships.
And by the same token, in the case of loan #9, back into accruals, like you said, you were actively involved with them on a collaborative basis. I'm just trying to understand the potential for loans in the portfolio that can be equitized or where you can succeed in bringing new buyers to those loans. How should we think about that as an opportunity going forward for the book?
I think it's important to contrast loan #9 with other reserving activities within the portfolio. Loan #9 was a foreclosure process, a judicial foreclosure process, and that takes a substantially longer amount of time for resolution than when challenging situations within portfolio companies can be resolved constructively and collaboratively. I'd say that the markets for assets that are undergoing challenges have improved significantly over the last year as expectations for rescheduling have moved from speculative to more definitive to, in the case of medical operators, executed. This is an environment that is constructive and positive for deploying capital and for finding solutions within the book, whether that's finding new equity investors, executing operational change or working towards an exit. This is a better environment for both deployment and reorganization and problem solving than we've seen in the last three years.
Right. And then on the topic of the unscheduled repayments, thank you for the table. You showed in the press release today about $48 million unscheduled repayment in the first quarter. And I think Phil mentioned another $15 million so far in the second quarter. Is that out of the norm? I'm just trying to understand what's driving those early repayments or is that just a normal part of the course.
These are part of the course and we labeled them unscheduled, but unscheduled doesn't necessarily mean a surprise. A few of them were nearing their maturity date.
Look, a couple more, and apologies if there's someone else in the Q&A queue. Looking at the 10-Q, loan #45 in Canada, I don't know if that's the first time you've done a loan outside of the U.S., but can you comment on that? And more in general, opportunities internationally, Europe and even more in Canada?
It's not the first time that REFI has executed a loan outside the U.S., and Chicago Atlantic as a platform has executed loans in Canada before. In the Canadian market, there has been stabilization in some cases and rationalization of the market in terms of unprofitable operators leaving. That's given room for profitable, well-executing operators to rise to the top, show strong results and provide opportunities for lenders to provide capital at very strong risk-adjusted returns. In the past we haven't seen that opportunity set arise as meaningfully or as clearly. We see this happen in markets that are oversaturated: they go through a period of rationalization and, after that, pockets of opportunity emerge.
One last one. I know we've talked...
Sorry to interrupt Mr. Zuanic. I request you to return to the queue for any follow-up questions, please. Thank you. You have the next question coming from the line of Chris Muller with Citizens Capital Markets.
So I wanted to ask some clarifications around Schedule III that you may or may not know the answers to at this point. I guess, first off, what percentage of your portfolio is medical? And I guess, how is that determined? Is that done at the license level, which my understanding is some states have adult-use licenses? Or is it determined by the end user being either medical or recreational?
Most of our borrowers that are operating as adult-use are also operating as medical operators. Each of them then parse their revenue by medical versus adult-use, but medical and adult-use sales in many cases can be operating out of the same dispensary. We haven't published what is medical versus adult-use. I'm hopeful that within 2026 it will be irrelevant, that the administrative hearings scheduled for June and July proceed, that adult use is rescheduled as well. The industry shouldn't have to analyze what's medical and what's adult-use separately so they can operate seamlessly. But we shall see. If adult-use rescheduling falters or slows down, then you'll see borrowers parsing medical versus adult-use operations to allocate costs optimally between their medical and adult-use operations to maximize tax efficiency. You may also see state regulators adjust definitions within their adult-use programs to shift more operations toward what they designate a medical program. I hope those types of acrobatics are unnecessary because the administration has executed on its pathway to reschedule the entire supply chain.
Got it. That's helpful. I think I saw California is doing something along those lines. Hopefully, full Schedule III gets done in June, but we'll see how that plays out. And then on the CECL reserve increase in the quarter, and I may have missed this in your prepared remarks, was that increase specific or general reserves? And how are you guys thinking about the impact on CECL reserves following Schedule III?
That reserve activity was a mix of both specific and general. That reserve activity reflects market discount rates, valuations and loan-to-values as of March 31, and they do not reflect subsequent events of rescheduling market activity and discount rates thereafter. Generally, rescheduling is credit positive for all of our borrowers, even those that don't have significant medical revenues.
Should we expect to see some CECL releases throughout 2026 as those 280E issues work through the companies?
It's certainly possible. CECL reserve movements would reflect inputs such as market sentiment, loan-to-values and cash flow calculations flowing through to the inputs that drive our CECL reserve policies and behaviors, not necessarily directly the rescheduling itself.
Great to hear we finally got some positive news in the sector.
You have the next question coming from the line of Aaron Grey with Alliance Global Partners.
First question: there's hope that we get the full plant rescheduled late summer or fall following the hearings. But potentially, if full plant reschedule takes a little more time, in that scenario do you potentially get more aggressive in medical-only states where you know you have the removal of 280E? Or does that change any of the potential near-term landscape opportunities?
I think it allows us to reflect in our underwriting the different tax treatment of medical revenues versus adult-use revenues. If adult-use rescheduling does not proceed, it will lead to different lenses for medical versus adult-use only because it drives different cash flow dynamics for the operators. That is the fundamental basis on which underwriters in this space will need to adjust. We will reflect that in our underwriting and deployment as well.
That's helpful color. A lot of people in the industry talk about potential impact of the hemp ban coming to fruition in November, having a broader impact on the legal cannabis market. What is your view on that and on your borrowers potentially if that comes to fruition and helps the fundamentals of your borrowers?
I've heard anecdotal feedback that the hemp ban has driven revenue increases, particularly in states with a larger prevalence of smoke shops and black market hemp CBD and cannabis-adjacent products. It's been difficult to find a direct link in the data, but there are anecdotal and correlative links between the hemp ban and regulated cannabis sales.
Okay. Great. Just last question for me. In terms of liquidity and pipeline, any color on timing to having some things in the pipeline come to fruition with the liquidity you still have available?
Our pipeline tends to refresh itself every three to six months. In that period, we have the opportunity to explore whether the transactions in the pipeline are ones we seek to close or ones that are not worthy of closing. It's difficult to forecast within that time frame what the deployment will be. I'll point out that in this quarter, at investors' request, we released a breakdown between real estate-backed and non-real estate loans within our portfolio to give investors a better view into what portion of our pipeline is more directly fit for Chicago Atlantic real estate financing.
As there are no further questions from the participants, this concludes our question-and-answer session. The conference has now concluded. We thank you for attending today's presentation, and you may now disconnect.