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Participants
Andreas A. Bodmeier; Co-President, CIO & Director of Chicago Atlantic REIT Manager, LLC; Chicago Atlantic Real Estate Finance, Inc.
Anthony Cappell; CEO & Director of Chicago Atlantic REIT Manager, LLC; Chicago Atlantic Real Estate Finance, Inc.
John Mazarakis; Executive Chairman of the Board of Chicago Atlantic REIT Manager, LLC; Chicago Atlantic Real Estate Finance, Inc.
Peter S. Sack; Co-President & Director of Chicago Atlantic REIT Manager, LLC; Chicago Atlantic Real Estate Finance, Inc.
Phillip Silverman; Interim CFO, Company Secretary & Controller; Chicago Atlantic Real Estate Finance, Inc.
Crispin Elliot Love; Director & Senior Research Analyst; Piper Sandler & Co., Research Division
Mark Eric Smith; Senior Research Analyst; Lake Street Capital Markets, LLC, Research Division
Harry M. Sullivan; President; SCR Partners, LLC

Presentation Operator
Good day, and thank you for standing by. Welcome to the Chicago Atlantic Real Estate Finance, Inc. Third Quarter 2023 Earnings Call. (Operator Instructions) Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speaker today, Tripp Sullivan.
Please go ahead.

Harry M. Sullivan
Thank you. Good morning. Welcome to the Chicago Atlantic Real Estate Finance conference call to review the company’s results for the third quarter of 2023. On the call today will be John Mazarakis. Executive Chairman; Tony Cappell, Chief Executive Officer; Andreas Bodmeier, Co-President and Chief Investment Officer; Peter Sack, Co-President; and Phil Silverman, Interim Chief Financial Officer. Our results were released this morning in our earnings press release, which can be found on the Investor Relations section of our website, along with our supplemental filed with the SEC. A live audio webcast of 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, November 8, 2023, and will not be updated subsequent to this call.

During this call, certain comments and statements we make may be deemed forward-looking statements within the meaning prescribed by the securities laws, including statements related to the future performance of our portfolio, our pipeline of potential loans and other investments, future dividends and financing activities. All forward-looking statements represent Chicago Atlantic’s judgment as of the date of this conference call and are subject to risks and uncertainties that can cause actual results to differ materially from our current expectations. Investors are urged to carefully review various disclosures made by the company, including the risk and other information disclosed in the company’s filings with the SEC. We also will discuss certain non-GAAP measures, including, but not limited to, distributable earnings and adjusted distributable earnings. Definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures are included in our filings with the SEC.

I’ll now turn the call over to John Mazarakis. Please go ahead.

John Mazarakis
Thanks, Tripp. Good morning, everyone. I said last quarter that it might be time to be cautiously optimistic, and we continue to stand by that same outlook. In addition to the positive developments in a number of states in the last 90 days, we’ve seen HHS come out with a recommendation to reschedule cannabis from a Schedule I to Schedule III, a positive development towards the elimination of the punitive tax burden of operators resulting from 280E as well as SAFE Banking taking a different form as SAFER. While we remain skeptical about the near-term prospects of SAFER passing Congress anytime soon and the all-important rule implementation to take even longer, the new perception is that changes at the federal level are more possible. That change in perception is positively affecting the reality for equity capital among investors and operators.

That reality has had a clear impact on the credit of our borrowers in absolute dollars. Now that there has been some movement at the federal level, we’ve been asked if we think that there will be a new supply of capital entering the industry, particularly among the larger banks. We continue to believe that the cannabis industry will remain capital-constrained for some time with demand accelerating and overall credit quality improving. If larger banks get involved in the industry as the federal regulations settle, we still think the first and best option will be to provide capital to proven lenders such as Chicago Atlantic. The learning curve and need to find a way for rule implementations will be a tough initial hurdle for the larger and more highly regulated financial institutions. We have remained fully committed to this industry from day one, and we’re big believers in the space. There isn’t an operator we’ve worked with and/or lent to or an investor in the industry who have doubted our commitment or ability to deliver on their capital needs.

With the largest platform, our own originations team, experience in direct lending, a well-capitalized and conservative balance sheet, and a diversified loan portfolio, we make the strongest case as the leading capital provider in the space. Another indication of how the environment has improved is that our pipeline of actionable deals has increased to over $600 million from $400 million last quarter. The originations team has been active in states such as Maryland, Missouri, and Ohio, where transaction activity has picked up because of the adult-use transitions. The maturities that we and other capital providers have talked about for some time still present a tangible and sizable opportunity. There are large operators that still need to refinance their bond and/or debt facilities in the next 12 to 18 months. When you add that to the growth in new states, the outcome is an upward lift to our pipeline.

We have always tried to be prudent and realistic when evaluating the cannabis space. I want to close with a point that drives everything we do here in Chicago Atlantic: each investment decision we make must provide our investors with an attractive yield and protection of principal. We’ve proven to be good stewards of our investors’ capital, and you can expect more of that stewardship as we navigate these opportunities ahead of us. I will now turn it over to Peter.

Peter S. Sack
Thank you, John. I’d like to first provide a quick update on our partnership with New York and New York’s Cannabis Social Equity Investment Fund. During the quarter, we funded approximately $19 million of the REIT’s $50 million commitment to the Social Equity Investment Fund. While there is ongoing litigation in New York surrounding licensing that has slowed deployment of the fund, we remain committed to supporting this initiative and CAURD licensees across the state, and we’re highly confident in the credit profile of our fundings to date. We are exploring social equity initiatives in other states, but it’s too early to report anything on that front. We bring an unmatched scale in the industry and expertise across real estate, operational, financial, legal, and credit underwriting to make these initiatives actionable. As we’ve noted before, we continue to focus our originations in core markets of interest while remaining very disciplined on our underwriting. You can expect that we will continue to take a lead in markets with strong moats and with operators who excel in the fundamentals.

Tony, why don’t you take it from here?

Anthony Cappell
Good morning. From a credit perspective, our portfolio has experienced a meaningful improvement in the last 60 to 90 days. With equity values responding positively to the potential rescheduling news, that’s a clear positive from a risk premium perspective and improves our position as equity values have increased. If 280E goes away, then the operator profitability and free cash flow should improve materially and multiples will expand, which is the type of event that usually attracts more equity capital. At September 30, our loan portfolio had total loan commitments of $356 million across 27 portfolio companies with a weighted average yield to maturity of 19.3% compared with 19.2% at June 30 and 18.3% a year ago. Our weighted average loan-to-enterprise value remained attractive at 42.5% compared with 41% at June 30. Based on the strong start to the quarter, which we disclosed on the last call, total gross originations increased $35 million, approximately $33 million of which was funded to new borrowers. That was partially offset by $11 million of principal repayments, $9 million of which was related to unscheduled early repayments. Our portfolio is 81% floating rate based…

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