Chicago Atlantic (REFI) Earnings Call Transcript

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Date

Tuesday, Nov. 4, 2025 at 9 a.m. ET

Call participants

Co-Chief Executive Officer — Peter Sack

Chief Operating Officer — David Kite

Chief Financial Officer — Phil Silverman

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Takeaways

Net interest income -- $13.7 million, a 5.1% decrease from $14.4 million in Q2 2025, with the reduction primarily attributed to lower nonrecurring prepayment and structuring fees.

Loan portfolio principal -- $400 million across 26 portfolio companies, with a weighted average yield to maturity of 16.5%, down from 16.8% in the previous quarter.

Gross originations -- $39 million of gross originations, including $20 million related to a new three-year, $75 million secured revolving credit facility with Verano and $11 million advanced to a new borrower.

Repayments -- $62.7 million in unscheduled principal repayments, previously disclosed as upcoming in the last quarter.

Interest rate exposure -- 86% of the portfolio is insulated from additional rate declines by being either fixed rate or protected by prime rate floors at 7% or higher; only 14% remains exposed to further rate reduction.

Leverage -- Total leverage measured 33% of book equity as of September 30, 2025, compared with 39% at June 30.

Liquidity -- $69.1 million available on the senior revolving facility

Distributable earnings per share -- 50¢ basic and 49¢ fully diluted distributable earnings per share (non-GAAP), modestly lower than 52¢ and 51¢ in the previous quarter.

Dividend declaration -- 47¢ per common share distributed in October.

Book value per share -- $14.71 on 21.5 million fully diluted common shares.

CECL reserve -- Reserve for expected credit losses of $5 million, equal to 1.25% of outstanding principal, up from $4.4 million at June 30.

Loan-to-enterprise value ratio -- 43.5% weighted average, calculated as senior indebtedness over collateral value.

Yield protection -- Management highlighted that "floating rate loans are not exposed to interest rate caps," according to David Kite, with floor mechanisms offering structural defense versus peer mortgage REITs.

Pipeline -- Cannabis pipeline active at approximately $141 million, described as diversified across growth investments, M&A activity, restructurings, and ESOP sale transactions.

Ownership alignment -- Management and board increased collective open-market share purchases, now holding nearly 1,800,000 shares on a fully diluted basis.

Geographic strategy -- Lending focused on limited license jurisdictions, which management claims provides more stable margins and market predictability.

Underwriting approach -- Policy emphasized on lending to operators with leverage under two times EBITDA and maintaining real estate plus all-asset collateral security.

Dividend payout guidance -- Management expects to maintain a dividend payout ratio of 90%-100% based on basic distributable earnings per share (non-GAAP), with a special dividend possible if taxable income requires.

Verano facility -- Largest real estate-backed revolving credit facility among US cannabis operators with a $75 million, three-year secured revolver.

New York Social Equity Fund -- Fund supported construction of 23 stores and has paused further capital deployment from Chicago Atlantic facilities, though the company is positioned to support renewed activity if resumed.

Summary

Chicago Atlantic Real Estate Finance (NASDAQ:REFI) reported a sequential decline in both net interest income and distributable earnings per share, with lower nonrecurring fee income contributing to the result. Management emphasized insulation from further interest rate declines by structuring loans with floor protections and highlighted a strong capital pipeline of approximately $141 million focused on cannabis investments. The company maintained high portfolio yield, conservative leverage at 33% of book equity, and strong real estate plus other asset collateral coverage. Proactive share purchases by management and board members expanded insider ownership, signaling alignment with shareholders. The dividend payout ratio is projected to remain within the 90%-100% range, with potential for a special dividend in the fourth quarter if higher taxable income requires it. Management remains committed to disciplined underwriting, limited license markets, and supporting existing borrower relationships, reflecting a strategy distinct from peers considering diversification outside cannabis lending.

Management stated, "only approximately 14% of our total loan portfolio is exposed to any further rate declines based on today's 7% prime rate."

Insider alignment strengthened as Sack said, "our management team and board of directors recently purchased shares on the open market, bringing our collective ownership of the common stock to nearly 1,800,000 shares on a fully diluted basis."

Sack clarified that pipeline changes are routine: "There was no significant exits other than the ordinary turnaround of our pipeline quarter over quarter."

Kite reported that the CECL reserve increased to $5 million, now covering 1.25% of outstanding principal, compared with $4.4 million as of June 30, 2025.

Silverman noted the loan-to-enterprise value ratio was 43.5% on a weighted average basis.

Industry glossary

CECL: Current Expected Credit Loss; a reserve estimate for expected loan losses under accounting standards.

ESOP: Employee Stock Ownership Plan; an employee benefit plan that provides staff with an ownership interest in the company.

Unitranche loan: A type of debt financing that combines senior and subordinated debt into a single facility with one blended interest rate.

Full Conference Call Transcript

Peter Sack, Co-Chief Executive Officer, David Kite, 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 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 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 law, 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.

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 Peter Sack. Please go ahead.

Peter Sack: Thank you, Tripp. Good morning, everyone. This quarter, against the backdrop of a volatile private credit environment, we demonstrate another consistent period of execution and performance. The benefits of our consistent approach and disciplined focus on principal protection yielded a strong quarter. And this quarter's gross originations have us on pace to hit our goal net growth in the loan portfolio. Challenges in private credit markets have created newfound concern in the investor community. Declining interest rates impacted lenders with floating rate portfolios. The syndicated loan market experienced high-profile failures of fraud, and excess capital in the market underlies perceived lack of underwriting standards.

I suspect that these broader concerns have caused us to trade at a sizable discount to our book value rather than the premium we long enjoyed since our IPO nearly four years ago. Noting this disconnect from the reality of our portfolio, our management team and board of directors recently purchased shares on the open market, bringing our collective ownership of the common stock to nearly 1,800,000 shares on a fully diluted basis. There are several reasons why we are so confident with what we've created at Chicago Atlantic. The first is that we have a cannabis pipeline that currently stands at approximately $141 million.

We believe that this pipeline of opportunities is unrivaled in the industry and is diversified across growth investments, maturities in the market, M&A activity related to operational and balance sheet restructurings, and potential ESOP sale transactions. Secondly, we have the most robust platform and capital to meet the growth of the industry. We deploy capital with consumer and product-focused operators in limited license markets at low leverage profiles to support fundamentally sound growth initiatives. I can't think of a better example of our commitment to the industry than Chicago Atlantic funding this quarter of what we believe to be the largest real estate-backed revolving credit facility among US operators in the history of the industry.

A $75 million three-year secured revolver with Verano. Lastly, we've constructed a portfolio with a differentiated and low-levered risk-return profile that is insulated from both cannabis equity and interest rate volatility. As David will break down for you in a moment, because we have structured our floating loans with interest rate floors, only approximately 14% of our total loan portfolio is exposed to any further rate declines based on today's 7% prime rate. That discipline provides a meaningful measure of protection to the portfolio. We are focused on delivering the kind of returns that we all expect to shareholders.

Confidence in the strategy is important, and hopefully, I've provided some insight into why we are enthusiastic and why we, as a management team, share repurchases in recent weeks. But execution on our plan matters even more. And I look forward to reporting on our continued progress over the balance of the year. David, why don't you take it from here?

David Kite: Thank you, Peter. As of September 30, our loan portfolio principal totaled approximately $400 million across 26 portfolio companies with a weighted average yield to maturity of 16.5% compared with 16.8% for the second quarter. Gross originations during the quarter were $39 million of principal funding, of which $11 million was advanced to a new borrower and $20 million was related to the new Verano credit facility that Peter mentioned earlier. These were offset by unscheduled principal repayments of $62.7 million that we disclosed last quarter. As of 09/30/2025, our portfolio consisted of 36.7% fixed-rate loans and 63.3% floating-rate loans. The floating rate portion is primarily benchmarked to the prime rate.

Following last week's 25 basis point rate reduction, bringing the prime rate to 7%, only 14% of our portfolio remains exposed to further rate decline. The remaining 86% is either fixed rate or protected by primary floors of 7% or higher. Importantly, our floating rate loans are not exposed to interest rate caps. Structural advantage combined with our rate floor protection positions our portfolio favorably compared to most mortgage REITs. Should the Federal Reserve implement another adjustment to the Fed funds target in December, we are well insulated against the adverse effects of declining interest rates. Total leverage equaled 33% of book equity at September 30 compared with 39% as of June 30.

As of September 30, we had $52.4 million outstanding on our senior secured revolving credit facility and $49.3 million outstanding on our unsecured term loan. As of today, we have approximately $69.1 million available on the senior credit facility and total liquidity net of estimated liabilities of approximately $63 million. I'll now turn it over to Phil.

Phil Silverman: Thanks, David. Our net interest income of $13.7 million for the third quarter represented a 5.1% decrease from $14.4 million during the second quarter of 2025. The decrease was primarily attributable to nonrecurring prepayment make-whole exit and structuring fees, which amounted to $1.1 million for Q3 2025 compared with $1.5 million in Q2 2025. Additionally, approximately $100,000 of the decrease in net interest income was attributed to the impact of the 25 basis point rate cut late in September on our floating rate portfolio and interest expense on our revolving credit facility. Total interest expense, including noncash amortization of financing costs for the third quarter, was approximately $1.6 million, down from $2.1 million in the second quarter.

The weighted average borrowings on our revolving loan decreased $14 million compared to $42.3 million during the second quarter. Our CECL reserve on our loans held for investment as of 09/30/2025 was approximately $5 million compared with $4.4 million as of June 30. On a relative size basis, our reserve for expected credit losses represents approximately 1.25% of our outstanding principal on our loans held for investment. On a weighted average basis, our portfolio maintains strong real estate coverage of 1.2 times. Our loans are secured by various forms of other collateral in addition to real estate, including UCC-1, all asset liens on our borrower credit. These other collateral types contribute to overall credit quality and lower loan-to-value ratios.

Our portfolio has a loan-to-enterprise value ratio on a weighted average basis of 43.5% as of September 30, calculated as senior indebtedness to the borrower divided by the fair value of total collateral. Distributable earnings per weighted average share on a basic and fully diluted basis were approximately 50¢ and 49¢ for the third quarter, a modest decrease from 52¢ and 51¢, respectively, during the second quarter. And in October, we distributed the third quarter dividend of 47¢ per common share declared by our board in September. Our book value per common share outstanding was $14.71 as of 09/30/2025. And there are approximately 21.5 million common shares outstanding on a fully diluted basis as of such date.

We continue to expect to maintain a dividend payout ratio based on our basic distributable earnings per share of 90% to 100% for the 2025 tax year. If our taxable income requires additional distributions, more than the regular quarter 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.

Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will take today's first question from Aaron Grey with Alliance Global Partners. Please proceed.

Aaron Grey: Hi. Good morning, and thank you very much for the questions here. First question for me, just want to talk about the pipeline a bit. So I know it's down a little bit from prior quarters. Just wanted to talk a bit about whether there are some large potential originations that exited the pipeline. And I know in the prior quarter, you had talked about ESOPs and potential opportunity there. So I want to see if you still see those as appealing within the pipeline opportunities. Thank you.

Peter Sack: Yes. ESOPs continue to form a large part of the pipeline. There was no significant exits other than the ordinary turnaround of our pipeline quarter over quarter. Our pipeline tends to refresh every quarter or so as deals either disappear, get turned down by us, or get funded. And so, yes, changes quarter over quarter are ordinary.

Aaron Grey: Okay. Great. Glad to hear ESOPs are still a good opportunity for you guys. Second question for me. Just in terms of some of the loans that are maturing before year-end, any color you can talk about in terms of how those conversations are panning out? I know you're still targeting net portfolio growth for the year. Any color on those would be greatly appreciated.

Peter Sack: We are negotiating the terms under which we may extend to maintain the business and maintain the position. And I expect that the vast majority of those loans that are maturing before the end of the year we will retain in some form or another.

Aaron Grey: Okay. That's great to hear. Last question for me. You don't have direct implications for new cannabis legalization in the election today, but some indirect, particularly for Virginia. You know, if there is a new government that comes in that's more pro-cannabis, particularly looking at that state, I know new states coming online could be a good opportunity for you guys. So how would you guys start to look at a state like Virginia in terms of opportunities there? And how the regulatory landscape exists today and could exist tomorrow based on past legislation for retail set? Thank you.

Peter Sack: No. We think Virginia is a very attractive medical market due to its very controlled licensure structure and the way in which the regulatory is set up, the geographic orientation of license holders. And we think it'll be an extremely attractive recreational market as well. So as those discussions progress, we're looking to extend our relationships in the state and deploy capital.

Aaron Grey: Okay. Great. Thanks for the call. I'll go and jump into the queue.

Peter Sack: Thanks, Aaron.

Operator: And today's next question comes from Chris Muller with Citizen Capital Markets. Please proceed.

Chris Muller: Good afternoon. Congrats on another solid quarter here. So you guys have done a really great job underwriting a pretty challenging part of the market here. So can you guys talk about your approach to underwriting and what's driving that success? Is it more the type of borrowers you focus on, the geographies, or maybe a combination of those?

Peter Sack: I think you put on some of the key points. The first, I think, the foundation of our underwriting is an analysis of each of the markets, each of the 40 states that have legalized medical or recreational cannabis. And that underwrite begins before we've deployed a single dollar into that market. And it's not just a focus on the state. It's also a focus, it's also a deeper dive into each piece of the supply chain within that market. We focus on limited license jurisdictions because we find that in these spaces, the regulatory mode creates greater predictability of wholesale prices, margins, and the competitive environment.

Within that framework, we're focused on operators with diverse sources of earning streams, whether that's earnings coming from a diverse portfolio of retail operations, retail and vertical integration, or retail vertical integration spread across multiple limited licenses states. And then lastly, in addition to real estate collateral, we are focused on lending to operators at conservative leverage levels under two times EBITDA. The combination of all of these factors, frankly, allows for diversity of repayment, diversity of potential growth opportunities. And then while we're in structuring loans, I think it's important that in the majority of our loans, not only is our capital going towards growth initiatives that drive EBITDA improvement, but the majority of our loans also include amortization.

And so the aim is that our loans will be less risky by their maturity date by virtue of EBITDA growth and loan paydown than they were at the outset. And that we can then continue to support those clients in the next phase of their growth, whether that's acquisitions, expansion of cultivation, expansion of retail. And it's really consistency with what we think are simple fundamentals, an approach to this industry, a focus on credit quality, and a focus on principal protection. That's allowed us to maintain the track record a lot of volatility in equity valuations and in the marketplace operating market in each of these states.

Chris Muller: Got it. That's all very helpful. And I guess maybe looking forward a little bit. So looking at the LTVs of your portfolio, they're well below what we see for a typical commercial mortgage rate. So if we do end up getting some type of reform, whether it's this year or next year, whenever that timing, what type of normalized LTV would you expect to see in the portfolio?

Peter Sack: Well, it's a difficult question to answer. There's a few variables. I would expect that in the case if the reform that we're discussing about is rescheduling, I haven't seen examples of a significant amount of new lenders entering the market in the event of rescheduling. And so I think there's opportunity to increase our loan sizes in many cases with many of our borrowers by nature of the improved cash flow dynamics of operators in a rescheduling environment because of the lack of the impact of 280E taxes. So that's one reason why you might see loan balances go up in a post-rescheduling world because the fundamental cash flow profile of the industry and of individual operators improved significantly.

Also, on the other hand, I would expect there to be a lot more equity interest in the sector as a result of rescheduling. And so I'd expect to see the denominator, the V in that ratio, increase significantly starting with public operators and public cannabis valuations. And so the combination of those two is difficult. It's difficult to parse exactly what would be the change in LTV.

Chris Muller: Got it. There's a lot of unknowns out there.

Peter Sack: Yeah. But, you know, I would note that we focus in our underwriting on the ability of a cannabis operator to service its indebtedness and to pay back that indebtedness. And that was our focus when cannabis companies were valued in the high teens EV to EBITDA, and that's our focus today when cannabis companies are valued in single-digit EV to EBITDA. And so it's an understanding of the cash flow and diversity of cash flows and the collateral is really fundamental to us and more fundamental to us than an ephemeral, potentially ephemeral market cap, potentially license value.

Chris Muller: Got it. It's all very, very helpful. And I guess, just one clarifying one real quick, if I could. Did I hear you guys correctly say that 86% of the portfolio has active floors in place as we sit today?

Peter Sack: That's a combination of floors and fixed rate.

Chris Muller: Got it. Got it. Got it. Alright. That was all the questions I had. Thanks very much.

Peter Sack: Thank you, Chris.

Operator: And the next question comes from Pablo Zuanic with Zuanic and Associates. Please proceed.

Pablo Zuanic: Thank you, and good morning, everyone. Peter, I realize that every company is different. But, for example, you know, AIPR this morning announced an investment outside cannabis, AFC Gamma into a BDC, investing outside cannabis. Chicago Atlantic BDC also is investing outside cannabis. Would Chicago Atlantic Real Estate Finance also consider, given the environment in cannabis?

Peter Sack: We have on occasion invested outside of cannabis. But we find that the risk-reward profile for real estate-backed loans in the cannabis space is simply much more attractive than the risk-reward in most cases than the risk-reward profile of real estate-backed loans in non-cannabis real estate opportunities. And that's what's driving the overwhelming allocation of the portfolio to cannabis opportunities in refi. But to the extent that changes, to the extent that we find attractive real estate-backed opportunities, we will certainly offer them to refi and may deploy them in refi. But, you know, Chicago Atlantic was founded with a focus on idiosyncratic and niche areas of the private credit market and with a focus on cannabis.

And that's part of our DNA, and that focus on cannabis and our fidelity to the sector is not going to change. And I think it's one of the reasons why we've persisted in this industry and continue to deploy in this industry as the equity markets have experienced significant volatility. As other lenders have exited the space, we think that focus and specialization can drive outsized returns and really differentiated returns for our investors. And that we can provide a better product, better support, better relationship with our clients, with our borrowers.

And we find that consistent presence in the market, that consistent support to our borrowers leads to better relationships, leads to more longevity of relationships, and leads to a greater ability for us to build relationships with the next top operator that emerges from the ecosystem.

Pablo Zuanic: Good color. Thank you. Just moving on in terms of 280E, you mentioned in the prior question that your main focus is on the company's ability to service debt, right? So how do you think about the uncertain tax provision that most MSOs have, right? The majority of them, well, most MSOs, not the majority, pretty much all of them except one, are paying their taxes, declaring taxes as a normal corporation and assuming 280E does not apply, and based on lawyers and auditors' recommendations, they are putting an item that's called uncertain as an uncertain tax provision or benefits as a long-term liability, right? We will see if it's ever due, and it doesn't have a maturity date.

But how do you factor that in your ability to service that?

Peter Sack: We consider it as another form of leverage. And so we aim to create covenants that limit the ability of our borrowers to incur uncertain tax liabilities above a certain amount. And that amount is set by our comfort with the total leverage profile of the company.

Pablo Zuanic: Thank you. Look, I know we normally do not talk about specific borrowers, but you mentioned Verano in your prepared remarks. I'm trying to understand here the dynamics. In the case of Verano, Chicago Atlantic, I believe as a group, not just refi, has about a $300 million facility, $292 million booked in Verano due next year, right? And now you have issued these revolvers for $75 million, a three-year revolver. I'm trying to understand the dynamics in terms of why not just restructure the whole thing and, you know, just have to restructure the $300 million loan that was due next year.

Or given that we know what's going to happen, before, you might have just, I'm just trying to understand why not do that as opposed to, you know, issuing a three-year short-term revolver here.

Peter Sack: We have incredible respect for the team at Verano and what the team at Verano has accomplished, what they're executing on today, and their growth prospects. And we think their footprint, their asset base, and their mindset when approaching the industry is something that we think is really unique within the space. And we really value the partnership. And so to the extent that we can support them in any way, we're going to be ready and willing, and we'll do our best to further their next growth initiatives, and that applies for the rest of our portfolio as well.

And so I can't, don't want to speak for what the team's aims are and how they wish to structure their balance sheet, but I can say that we value their relationship, we value their partnership, and we'd love to support them in any way we can. And I'm really excited for what they're executing on within their portfolio.

Pablo Zuanic: Okay. And then one last one, if I may. I know that we've discussed, you know, the competition from other sectors before. I was recently at the Blangrom conference, but neither there, they said that they have issued about $500 million in loans to the cannabis sector, including Curaleaf most recently. They said it would never go to $2 billion, but they imply that it could, you know, double the current amount. So my read is that the competition from the regional banks under the current regulatory statute pool is increasing. Whether it's Valley Bank, Needham, or other people. Am I wrong about that read?

Peter Sack: I think those banks that have developed an expertise, that have invested in the infrastructure and invested in the relationships with the cannabis space, in general, those banks have done well because they've deployed capital with discipline and conservatism and built relationships with some of the strongest operators in the space. And in many cases, those banks are now opting to go deeper because they've seen success. So I think we've seen that amongst some of the largest banks that have consistently deployed capital in the space, they're seeking to do more. And that's great. We view banks as partners in our strategy. There are leverage providers in both our public and private funds. There are co-lenders in many transactions.

There are co-lenders in unitranche transactions. And so we think they're an integral part of the lending ecosystem, and they're part of this process of building a mature capital market for the cannabis industry. And I think to compare just to compare where the banking industry sits within the broader private credit ecosystem today, banks are not outside of the cannabis industry. Banks are operators alongside the private credit space. And the private credit space, whether that's mortgage REITs or BDCs, operate alongside the banking ecosystem, and they benefit one another significantly and work together as part of this ecosystem.

And that's what we hope to see develop in the cannabis industry, and that's what we're trying to build at Chicago Atlantic through our various partnerships with nearly all of the major banks that are operating in the cannabis space today. So long story short, we welcome and have worked to help banking institutions enter the cannabis space, and we hope more will do so.

Pablo Zuanic: Can you give an update in terms of your lending program to New York? I know it's a loan to a regulator, right? It's not to a fund or not necessarily to stores. I can wait up to 251 stores. Obviously, the state continues to expand in terms of retail stores, but I haven't seen that necessarily reflected in your loan book, or maybe I'm missing something. If you can provide an update on that. Thank you.

Peter Sack: The New York Social Equity Fund has opted not to draw additional capital from our funds. They've supported the construction of close to 23 stores across the state, and they've taken a pause on deployment. That being said, we are ready and willing to support them if they decide to continue deployments and continue to grow the portfolio of stores that they're supporting.

Pablo Zuanic: Got it. Thank you.

Operator: This concludes our question and answer session for today. I would now like to turn the conference back over to Peter Sack for any closing remarks.

Peter Sack: Thank you all for the support and the questions. Glad to follow up offline with any questions, and please reach out anytime. Thank you again.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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