Chicago Atlantic Real Estate Finance, Inc. (NASDAQ:REFI) has continued its disciplined growth strategy in the first quarter of 2024, expanding its loan portfolio while maintaining strong credit quality and an attractive weighted average portfolio yield. The company's performance has been underpinned by favorable market conditions, including increased demand for capital from cannabis operators, as well as the company's proactive approach to accessing additional financing.

Financials

For the full year 2023, REFI reported annual net income of $38.71 million, annual revenue of $63.00 million, annual operating cash flow of $28.42 million, and annual free cash flow of $28.42 million. In the first quarter of 2024, the company generated net income of $8.73 million and net interest income of $13.24 million, reflecting a 10.8% sequential decline from the fourth quarter of 2023, primarily due to a lack of unscheduled principal repayments during the quarter.

Loan Portfolio

The company's loan portfolio continued to grow, reaching total commitments of $401.3 million across 28 portfolio companies as of March 31, 2024, up from $378.8 million across 27 companies at the end of 2023. The portfolio maintained a weighted average yield-to-maturity of 19.4%, consistent with the prior quarter. Floating-rate loans, which comprised 76.6% of the portfolio, continued to benefit from the rising interest rate environment, with the Prime Rate increasing to 8.50% as of the end of the first quarter.

Geographic Diversification

REFI's geographic diversification remained a key strength, with borrowers operating across 15 states as of March 31, 2024. The top three states by outstanding principal were Michigan (15%), Maryland (14%), and Florida (13%). This diversification helps mitigate concentration risk and exposure to any single market.

Credit Quality

The company's credit quality remained stable, with 78% of the portfolio risk-rated 3 or better as of March 31, 2024, consistent with the prior quarter. One loan, representing 4.4% of the portfolio, remained on non-accrual status, with a reserve for current expected credit losses of $1.3 million. Overall, the company's CECL reserve increased to $5.4 million, or 1.4% of outstanding principal, from $5.0 million at the end of 2023.

Balance Sheet and Liquidity

REFI's balance sheet remained conservatively leveraged, with a debt-to-equity ratio of 0.28 as of March 31, 2024, up from 0.24 at the end of 2023. The company's revolving credit facility was expanded to $150 million during the quarter, with $81.3 million outstanding as of the end of the first quarter, providing ample liquidity to support future growth.

Capital Allocation

The company's disciplined approach to capital allocation was evident in its use of the at-the-market (ATM) offering program during the quarter. REFI issued approximately 896,000 shares through the ATM at a weighted average price of $15.93, raising net proceeds of $13.9 million. This capital was raised at a premium to the company's book value of $14.97 per share as of March 31, 2024, up from $14.94 at the end of 2023.

Outlook

Looking ahead, REFI remains optimistic about the industry's prospects, particularly in light of the recent announcement that the Drug Enforcement Administration (DEA) plans to reschedule cannabis. While the company does not expect any immediate impact from this development, it believes the eventual rescheduling could bring significant benefits to the industry, including the elimination of Section 280E tax restrictions, increased access to capital, and greater employment and investment.

REFI's pipeline of actionable deals currently stands at $585 million, with a continued focus on operators in limited-license states and those transitioning from medical to adult-use cannabis. The company's disciplined underwriting and proactive approach to managing its balance sheet have positioned it well to capitalize on the evolving cannabis landscape.

Conclusion

In summary, REFI has delivered another quarter of solid performance, growing its loan portfolio while maintaining strong credit quality and an attractive yield profile. The company's conservative leverage, ample liquidity, and disciplined capital allocation have positioned it to navigate the changing regulatory environment and capitalize on the continued growth of the cannabis industry. With a robust pipeline of opportunities and a proven track record, REFI remains well-positioned to deliver attractive risk-adjusted returns for its shareholders.