Chicago Atlantic’s Koach Notes Lift Earnings to $0.49 Per Share

By Amara Osei

$527.7 million in loans across 28 portfolio companies and $0.49 per diluted share defined Chicago Atlantic Real Estate Finance’s third quarter: Koach Notes drove portfolio growth and earnings. Management expects fourth-quarter originations to slow as it explores ways to expand liquidity.

President and Chief Operating Officer David Kite put the portfolio’s weighted average yield to maturity at 14.8% on September 30. The Koach Notes sat within stockholders’ equity, not loans or assets under generally accepted accounting principles.

Chicago Atlantic funded $85.1 million of principal during the quarter, including $62.6 million from the Koach transaction. Repayments came to approximately $13.2 million. Non-accrual loans held flat in dollars and eased to 3.1% of the portfolio from 3.7%, mainly because the portfolio grew.

Chicago Atlantic (Nasdaq: REFI) is a specialty finance company organized as a real estate investment trust. It originates, acquires and manages commercial real estate loans and other credit investments, emphasizing opportunities in the cannabis industry. It primarily provides senior secured loans to state-licensed cannabis operators, cultivators, processors, dispensaries and related businesses. Collateral may include commercial real estate, cannabis-related assets or other collateral.

Scale rose; non-accrual dollars did not.

What did the Koach Notes change?

Chicago Atlantic issued approximately 4.3 million common shares at $14.353 apiece in July, exchanging them for second-lien notes carrying $62.6 million of aggregate principal. A Florida property sale repaid one of the 32 notes and generated approximately $900,000 in fee income, Co-Chief Executive Officer Peter Sack said.

The notes contributed approximately $2.6 million to third-quarter distributable earnings. Their stated annual yield was approximately 12%, but the portfolio generated an annualized return above 18% during the quarter.

Chief Financial Officer Phil Silverman said interest, principal and exit-fee cash flows from the notes ran through stockholders’ equity rather than GAAP interest income. Reported net interest income fell 2.3% from the second quarter to $12.5 million; adjusted net interest income, including cash interest proceeds from the Koach Notes, reached $15.1 million, up approximately 18%.

The company paid a $0.47-per-share regular quarterly dividend in October, its 18th consecutive quarter at that rate. Adjusted book value per share, a non-GAAP measure that assumes the Koach Notes were repaid in full, stood at $14.12 on September 30, versus $14.15 on June 30.

Koach lifted earnings, not GAAP interest income.

How much liquidity remains for new loans?

Approximately $15.2 million was available on Chicago Atlantic’s senior secured revolving credit facility as of the call. Total liquidity stood at approximately $12 million after estimated liabilities and anticipated fundings. During the quarter, the company raised the facility’s borrowing capacity by $7.5 million to $117.5 million, then funded another $3.2 million to existing borrowers after quarter-end.

Sack said the potential lending pipeline declined partly because the quarter’s fundings drew on resources and available liquidity had largely been used. Management expects fourth-quarter originations to slow while it explores ways to expand liquidity.

He also identified possible expansions of medical cannabis markets. A vehicle without a real estate mandate could pursue a broader set of opportunities, an argument for the proposed merger with Chicago Atlantic BDC Inc.

Liquidity now caps the lending pace.

What does the proposed merger require?

The board and special committee weighed the company’s relatively small scale, the investment limits tied to its REIT status and constraints on institutional capital access. Sack said: “The combined company could offer greater scale and diversification,” while cautioning that greater investor interest was not assured.

Silverman said the merger materials were undergoing customary Securities and Exchange Commission review. Stockholders must approve both Chicago Atlantic’s election to be regulated as a business development company and the merger itself. The deal also needs other required approvals and consents.

Approvals remain unfinished.

How does the portfolio respond to rates?

Approximately 57% of the portfolio benefits from interest-rate increases, Sack said, even though Chicago Atlantic’s stock has traded similarly to broader mortgage REITs whose portfolios differ. He estimated that “each 25-basis-point increase would add $0.015 per share to quarterly distributable earnings.”

Kite said 64% of loans were floating-rate and 36% were fixed-rate at quarter-end. Floating-rate loans carried rate floors and no interest-rate caps.

Most loans still float; rate increases help.