Executive Summary / Key Takeaways

• Chicago Atlantic Real Estate Finance (REFI) operates as a commercial mortgage REIT specializing in senior secured loans to state-licensed cannabis operators, prioritizing credit and collateral protection in a volatile industry.
• The company's operational platform, featuring extensive origination, diligence, and analytical capabilities, provides a competitive edge in underwriting and managing risk, contributing to its differentiated risk-adjusted returns.
• First quarter 2025 results showed Net Income of $10.04 million, an increase from $8.73 million year-over-year, significantly benefiting from a $1.07 million reversal in the credit loss reserve, primarily related to the successful restructuring of Loan 9.
• REFI maintains a strong liquidity position, supported by its Revolving Loan facility ($72 million available as of March 31, 2025) and unsecured notes, and aims for net portfolio growth in 2025, with deployments expected to accelerate in Q2 and Q3.
• Management expects to maintain a dividend payout ratio of 90% to 100% of basic distributable earnings for the 2025 tax year, underscoring its commitment to consistent current income for stockholders.

The Foundation: Lending to a Niche Market with Discipline

Chicago Atlantic Real Estate Finance, Inc., established in March 2021 and electing REIT status later that year, carved out a specific niche in the commercial mortgage real estate investment trust sector. Its core mandate is clear: provide attractive, risk-adjusted returns primarily through current income by originating and investing in senior secured loans. While the company is structured to lend against commercial real estate broadly, its primary focus has been on providing financing to state-licensed operators within the burgeoning, yet federally complex, cannabis industry. This focus defines its market position and investment strategy.

Operating in the cannabis finance space presents both unique opportunities and significant challenges. Traditional financial institutions often face regulatory hurdles preventing them from lending to cannabis businesses, creating a supply-demand imbalance that allows non-bank lenders like REFI to command higher yields. However, this market also carries inherent risks, including the federal illegality of cannabis, potential difficulties in enforcing collateral rights, and volatility in the underlying businesses.

Within this landscape, REFI competes with other specialized cannabis-focused real estate finance companies, notably Innovative Industrial Properties (IIPR), NewLake Capital Partners (NLCP), and AFC Gamma (AFCG), as well as facing potential indirect competition from traditional lenders as regulations evolve. While IIPR and NLCP primarily focus on sale-leaseback transactions, providing capital through property ownership and long-term leases, REFI's model centers on originating senior secured debt. This positions REFI as a direct lender, offering a different capital solution to operators. Compared to peers like IIPR, which boasts a larger market share (estimated 30-40%) and potentially higher profitability margins (net margins around 60-65%), REFI holds a smaller, though growing, share (estimated 10-15%). REFI's net margins (67.98% TTM) appear competitive, though direct comparisons require careful consideration of business models and reporting nuances. AFCG also operates in the debt financing space, and while direct quantitative comparisons on all metrics can be challenging, REFI aims to differentiate through its rigorous underwriting and focus on collateral quality.

The Operational Edge: Underwriting and Risk Management Platform

REFI's ability to operate effectively and manage risk in its chosen market is underpinned by its operational platform. This is where the company demonstrates a form of technological and process differentiation. The platform includes what management describes as the industry's most expansive origination, real estate diligence, analytics, and operational teams. These teams utilize proprietary analytical methods and digital underwriting tools to evaluate potential loans.

This operational infrastructure is designed to provide tangible benefits. The use of digital underwriting tools and a specialized team contributes to faster loan processing compared to some traditional methods or less specialized lenders. While specific quantitative figures on processing speed or cost advantages relative to all competitors are not uniformly available, competitive analysis suggests REFI's digital tools could lead to lower operating costs per unit and faster processing in certain financing types. The "so what" for investors is that this operational edge supports REFI's ability to source and underwrite loans efficiently, maintain discipline in its lending standards, and actively manage its portfolio, all of which are critical for generating consistent income and protecting principal in a high-yield, high-risk market. This capability forms a key part of REFI's competitive moat, allowing it to navigate the complexities of cannabis lending more effectively than less specialized capital providers.

Performance and Portfolio Resilience

REFI's financial performance reflects its strategy of generating income from its loan portfolio while managing associated risks. For the first quarter ended March 31, 2025, the company reported Net Income of $10.04 million, an increase from $8.73 million in the prior year period. Net interest income saw a slight decrease, coming in at $13.04 million compared to $13.24 million in Q1 2024. This was influenced by a decrease in the percentage of floating-rate loans in the portfolio (58.5% at March 31, 2025, down from 77% at March 31, 2024) and a lower weighted average YTM/IRR (16.9% vs. 19.4%), partially offset by changes in non-recurring fees. Interest expense remained relatively consistent year-over-year, with the addition of expense from the $50 million unsecured notes (approximately $1.2 million in Q1 2025) being offset by a lower average balance on the Revolving Loan.

A notable factor impacting the Q1 2025 results was a significant benefit provision for current expected credit losses of $1.07 million, compared to a provision of $380 thousand in Q1 2024. This swing was primarily driven by a $1.2 million reversal of the CECL reserve related to Loan 9 following its restructuring. The overall CECL reserve stood at approximately $3.3 million as of March 31, 2025, representing about 83 basis points of the aggregate loan commitments held at carrying value. Changes in the portfolio's risk composition also contributed to the decrease in expected credit losses, with the portion of the portfolio risk-rated 4 decreasing from 9.4% at December 31, 2024, to 5.4% at March 31, 2025. Approximately 83% of the portfolio at carrying value was risk-rated 3 or better as of March 31, 2025.

As of March 31, 2025, the loan portfolio held for investment had a carrying value of $399.46 million (net of OID). The portfolio composition included 40.7% fixed-rate loans and 59.3% floating-rate loans. The weighted average YTM/IRR was 16.9%. Collateral coverage remains a key focus, with approximately 50% of the portfolio fully secured by real estate and the portfolio on average having real estate collateral coverage of 1.1x. All loans are secured by equity pledges and all asset liens. The portfolio is diversified across various states where cannabis is legal, including significant exposure to Illinois (15%), Ohio (15%), Florida (11%), and Pennsylvania (9%). Borrower concentration is managed, with the top three borrowers representing 24.6% of principal outstanding.

The situation with Loan 9 serves as a case study in REFI's approach to distressed assets. Placed on non-accrual in May 2023, the company pursued foreclosure, ultimately resulting in a restructuring in March 2025. The original loan was extinguished, and REFI received new loans totaling approximately $16.5 million (a $14.5M Judgment Loan and a $2M Term Loan), secured by the original real estate assets. This new structure provides REFI with a senior liquidation preference and represents the only indebtedness in the borrower's new capital structure. While the loan remains on non-accrual status as of March 31, 2025, management is monitoring the financial performance of the underlying dispensaries, which became operational in April 2025, with the hope of restoring the loan to accrual status this year. This workout demonstrates the company's expertise and capability in navigating complex downside scenarios in this unique industry.

Capital Strategy and Outlook

REFI's capital strategy is designed to support portfolio growth and meet its REIT distribution requirements. The company utilizes a secured revolving credit facility, which had $38 million outstanding and $72 million available as of March 31, 2025, with an aggregate commitment of $110 million (expandable to $150 million). This facility matures in June 2026 and bore interest at 7.50% as of March 31, 2025. Additionally, the company has $50 million in senior unsecured notes maturing in October 2028, bearing a fixed interest rate of 9.00%, with $49.16 million net outstanding at quarter-end. Both debt facilities were in compliance with financial covenants as of March 31, 2025.

The company also accesses equity capital through its At-the-Market (ATM) offering program, which was increased to $100 million in March 2025. In Q1 2025, REFI raised approximately $1.0 million in net proceeds through the ATM at a weighted average price of $16.01 per share, representing a premium to the March 31, 2025 book value of $14.87 per share. This demonstrates the company's ability to raise accretive equity capital.

Looking ahead, REFI aims for net portfolio growth in 2025. While Q1 saw limited deployment ($4.4 million in gross fundings), management expects deployments to accelerate in the second and third quarters, driven by opportunities in CapEx and M&A within the cannabis industry. The pipeline across the Chicago Atlantic platform stood at $462 million as of early May 2025. A significant portion of the portfolio faces maturities in 2025, and REFI intends to compete aggressively to refinance these positions and maintain relationships with performing borrowers.

As a REIT, REFI is required to distribute at least 90% of its taxable income annually. Management has guided for a dividend payout ratio based on basic distributable earnings per share of 90% to 100% for the 2025 tax year. This commitment to returning capital is a key component of the investment thesis, with the potential for a special dividend in the fourth quarter if required to meet taxable income distribution requirements.

Risks and Considerations

Investing in REFI involves exposure to the inherent risks of lending to the cannabis industry. These include the ongoing federal illegality of cannabis, which can impact borrowers' access to traditional banking, the enforceability of collateral, and the potential for changes in enforcement priorities. Borrowers also face risks related to maintaining state licenses and navigating evolving state-level regulations. While REFI's loans are secured by real estate and other assets, the ability to take possession of collateral in a default scenario can be complex in the cannabis space, potentially leading to losses if assets must be sold.

Credit risk remains paramount, and while REFI employs rigorous underwriting and portfolio monitoring, unanticipated credit events or economic downturns impacting borrower performance could affect asset quality and profitability. Concentration risk exists due to the limited number of large, established operators in the industry and geographic concentration in key states. Interest rate risk impacts the floating-rate portion of the portfolio and borrowing costs, although REFI has taken steps to mitigate this through fixed-rate loans and floating-rate loan floors.

Management's strategy to mitigate these risks includes conservative underwriting assumptions (assuming no federal reform), focusing on limited license states with established operators, structuring loans with strong collateral packages (including equity pledges and guarantees), implementing strict covenants, and actively managing the portfolio, including pursuing workouts and restructurings when necessary, as demonstrated by the Loan 9 case.

Conclusion

Chicago Atlantic Real Estate Finance offers investors exposure to the high-yield cannabis finance market through a disciplined, senior secured lending strategy. The company's operational platform provides a competitive advantage in underwriting and managing the unique risks of this niche. Recent performance, including the successful restructuring of a non-accrual loan and a significant related reserve reversal in Q1 2025, underscores its capabilities in navigating challenging credit situations. With a strong liquidity position, a clear outlook for portfolio growth driven by identified opportunities, and a commitment to distributing income, REFI presents a compelling narrative for investors seeking yield in alternative real estate finance. While risks inherent to the cannabis industry persist, REFI's focus on credit quality, collateral, and active management positions it to capitalize on market opportunities while seeking to protect stockholder capital. Investors should monitor portfolio growth execution, credit quality trends, and the company's ability to refinance upcoming maturities as key indicators for the investment thesis.