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 principal protection and consistent income in a volatile industry.
• The company employs a sophisticated analytical and risk management framework, utilizing third-party valuations and probability-weighted models for credit assessment and CECL reserves, which serves as a core operational differentiator.
• REFI's loan portfolio is strategically structured, with 86% insulated from further interest rate declines through fixed rates or prime rate floors, providing a significant hedge against market volatility.
• Despite a slight decrease in net interest income in Q3 2025 due to lower nonrecurring fees and prime rate adjustments, the company aims for net portfolio growth in 2025, supported by a robust $441 million cannabis pipeline.
• Management's confidence is underscored by recent open market share purchases, bringing collective ownership to approximately 8.2% of fully diluted common shares, and a commitment to a 90-100% distributable earnings payout ratio.

Introduction: The Unconventional Edge of Chicago Atlantic

In the specialized and often misunderstood landscape of the U.S. cannabis industry, Chicago Atlantic Real Estate Finance, Inc. (REFI) has carved out a distinct and disciplined niche. Operating as a commercial mortgage REIT, REFI's core business revolves around originating, structuring, and investing in first mortgage loans and alternative structured financings. These loans are predominantly secured by commercial real estate properties and extended to state-licensed operators within the burgeoning cannabis sector. The company's overarching strategy, established since its incorporation in March 2021, is to deliver attractive, risk-adjusted returns to stockholders, primarily through consistent current income dividends and distributions, and secondarily through capital appreciation.

REFI's approach is notably conservative, undergirding its portfolio with the explicit assumption that the federal regulatory environment for cannabis will not improve. This stance insulates its investment thesis from the frequent gyrations of cannabis equity markets, which often react sharply to shifting sentiment around federal reform. The company's focus remains steadfast on credit quality and principal protection, irrespective of external market volatility. This disciplined posture positions REFI as a specialized lender in a fragmented market, where it competes with other cannabis-focused REITs and finance companies, as well as indirectly with traditional commercial lenders and alternative financing platforms.

A Foundation Built on Discipline: History and Strategy

REFI's journey began in March 2021, electing REIT status to benefit from federal income tax exemptions by distributing at least 90% of its taxable income. From the outset, the company recognized the unique opportunities and inherent risks within the cannabis industry. Its historical growth reflects a strategic expansion of its investment portfolio, with total assets rising from $278.17 million in 2021 to $427.08 million by September 30, 2025. This expansion has been supported by a carefully constructed financing framework, including a secured revolving credit facility, which has seen its commitment grow to $110 million and its maturity extended to June 30, 2028. Further diversifying its capital structure, REFI secured a $50 million senior unsecured term loan in October 2024.

The company's strategy emphasizes deploying capital with consumer and product-focused operators in limited license jurisdictions. This focus on controlled markets aims to provide greater predictability in wholesale prices, margins, and the competitive environment. REFI targets operators with diverse earnings streams, whether from retail, vertical integration, or operations across multiple limited license states. Loans are structured with conservative leverage levels, typically under 2x EBITDA, and often include amortization, designed to reduce the loan's risk profile by maturity through EBITDA growth and principal paydown. This disciplined approach has allowed REFI to maintain a strong track record despite significant volatility in equity valuations and operating marketplaces.

Proprietary Analytics: REFI's Core Differentiator

While not a technology company in the traditional sense, REFI's operational backbone is its sophisticated analytical and risk management technology. This proprietary framework is a critical differentiator, enabling the company to navigate the complexities of cannabis lending with precision. REFI's risk analysis relies on its Manager's extensive experience, estimates, and models that incorporate fair value and interest rate sensitivity.

The company actively employs portfolio-wide and asset-specific risk measurement and management processes. This includes utilizing the Manager's risk management tools, which comprise both licensed third-party software and internally developed analytical methods. For instance, REFI estimates its Current Expected Credit Loss (CECL) Reserve using a third-party probability-weighted model. This model considers the likelihood of default and expected loss given default for each individual loan, projecting approximately three years into the future before reverting to historical loss data. This process is further enhanced by considering historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment.

A key aspect of REFI's analytical technology is its methodology for estimating the enterprise value of its borrowers to calculate Loan-to-Value (LTV) ratios. The Manager engages third-party valuation appraisers, primarily using comparable transactions and supplementing this with a multiple-based approach to enterprise value-to-revenue multiples of publicly traded comparable companies. A private company discount is then applied based on the borrower's profile. This rigorous, data-driven approach to valuation and credit assessment provides tangible benefits. It allows REFI to make informed lending decisions, structure loans with appropriate collateral coverage (averaging 1.2x real estate collateral coverage as of September 30, 2025), and manage its CECL reserve effectively. The continuous evaluation of credit quality, including borrower-specific factors and macroeconomic conditions, ensures that REFI's portfolio remains robust and its risk profile is actively managed. This analytical rigor directly contributes to REFI's competitive moat, enhancing its ability to protect principal, optimize yields, and maintain a strong market position in a high-risk sector.

Financial Resilience Amidst Volatility

REFI's financial performance reflects its disciplined strategy and robust analytical capabilities, even in a dynamic market. For the nine months ended September 30, 2025, the company reported interest income of $46.86 million, a slight increase from $46.62 million in the prior year, driven by an increase in the outstanding principal balance of its loan portfolio. Net interest income for the same period was $41.15 million, up from $40.88 million. However, for the three months ended September 30, 2025, interest income decreased by approximately $1 million, or 6%, compared to the same period in 2024. This was primarily due to a decrease in the weighted average portfolio yield to 16.50% from 18.20%, a result of re-pricing amendments aimed at de-risking the portfolio and the impact of a 75 basis point prime rate decline.

The company's net income for the nine months ended September 30, 2025, stood at $27.85 million, compared to $29.13 million for the same period in 2024. Earnings per common share (basic) were $1.33 for the nine months ended September 30, 2025, down from $1.53 in the prior year. This was influenced by an increase in the provision for current expected credit losses (CECL), which rose by approximately $1.50 million for the three months ended September 30, 2025, driven by new loan originations and an increase in loans risk-rated 4. The CECL reserve now represents approximately 1.25% of the aggregate loans held for investment at carrying value, up from 1.06% at December 31, 2024.

Liquidity remains a strength, with cash and cash equivalents of $28.92 million as of September 30, 2025. The company also had $57.60 million available under its revolving loan facility, bringing total liquidity, net of estimated liabilities, to approximately $63 million. This robust liquidity position is crucial for funding new investments and managing operational needs.

REFI's dividend policy is designed for consistency, with a regular quarterly cash dividend of $0.47 per share declared for Q3 2025. The company aims to maintain a dividend payout ratio of 90% to 100% of its basic distributable earnings per share for the 2025 tax year, with any additional distributions expected as a special dividend in Q4. This strategy underscores management's commitment to shareholder returns while maintaining a strong margin of safety for the regular dividend.

Competitive Positioning in a Niche Market

REFI operates within a specialized segment of commercial real estate finance, primarily serving the cannabis industry. Its competitive landscape includes other cannabis-focused REITs and finance companies such as Innovative Industrial Properties (IIPR), NewLake Capital Partners (NLCP), and AFC Gamma (AFCG).

REFI's market positioning is characterized by its direct lending model, which emphasizes originating and structuring first mortgage loans. This contrasts with IIPR and NLCP, which primarily focus on sale-leaseback transactions and long-term triple-net leases. While IIPR and NLCP benefit from established portfolios and predictable rental income, REFI's loan-centric approach allows for greater flexibility and customization in financing solutions, appealing to operators seeking direct debt capital for growth initiatives or balance sheet restructuring. REFI's specialized expertise in navigating the complex regulatory environment of the cannabis industry, combined with its REIT structure, provides a distinct advantage in offering attractive, tax-efficient returns to investors.

Compared to AFCG, which also provides senior secured loans to cannabis companies, REFI's focus on real estate-specific structuring can offer a more tailored approach for property owners. REFI's analytical and risk management technology, including its sophisticated CECL modeling and LTV calculations, provides an operational edge in assessing and mitigating credit risk in this unique sector. This allows REFI to maintain a well-collateralized loan portfolio, with a weighted average real estate collateral coverage of 1.2x as of September 30, 2025.

While REFI's scale may be smaller than some established competitors like IIPR, its strategic adaptability and deep industry relationships are significant strengths. The company's cannabis pipeline, standing at approximately $441 million, is considered unrivaled in the industry, indicating strong deal sourcing capabilities. REFI views banks as partners, not just competitors, leveraging these relationships for co-lending opportunities and broader market development. This collaborative approach, combined with its specialized focus and robust analytical framework, positions REFI to effectively compete for high-quality lending opportunities, even as the industry matures and other lenders enter the space.

Outlook and Risk Management: A Prudent Path Forward

REFI's outlook is anchored in a pragmatic assessment of the cannabis industry's growth trajectory and a disciplined approach to risk. The company aims for net portfolio growth in 2025, supported by its robust pipeline of opportunities, which includes growth investments, maturities, M&A activity, and ESOP sale transactions. Management anticipates deployments to accelerate in the second and third quarters of 2025, following a period of more limited originations in Q1 driven by selectivity and broader industry caution.

A key aspect of REFI's risk management strategy is its insulation from interest rate volatility. As of September 30, 2025, approximately 86% of its total loan portfolio is either fixed-rate or protected by prime rate floors of 7% or higher, significantly limiting exposure to further rate declines. This structural advantage positions REFI favorably compared to many mortgage REITs. The company also proactively manages credit risk through its comprehensive underwriting process and continuous monitoring of its loan portfolio. This includes the successful restructuring of Loan 9, which demonstrated REFI's capability to manage defaults and support business operations in downside scenarios, even without access to traditional bankruptcy courts.

However, REFI acknowledges several pertinent risks. The federal illegality of cannabis remains a foundational risk, impacting borrowers' operations and potentially limiting REFI's ability to take possession of collateral in default scenarios. The company explicitly underwrites loans assuming no federal reform, viewing any positive changes as catalysts rather than dependencies. Unpaid tax liabilities (280E) are considered a form of indebtedness and are factored into underwriting, with covenants designed to limit their accrual. While the U.S. cannabis market is projected to surpass $40 billion in 2025 and grow to over $70 billion by 2030, competition for capital is increasing. REFI mitigates this by focusing on its specialized expertise and strong borrower relationships.

Conclusion

Chicago Atlantic Real Estate Finance stands as a compelling investment proposition, offering investors a unique blend of high-yield income and principal protection within the dynamic U.S. cannabis real estate sector. The company's unwavering commitment to a disciplined underwriting process, its sophisticated analytical and risk management technology, and a strategically structured loan portfolio provide a robust foundation for consistent performance. With 86% of its portfolio shielded from further interest rate declines and a strong pipeline of opportunities, REFI is well-positioned for continued growth and shareholder returns. The proactive management of risks, including federal regulatory uncertainty and borrower credit quality, further reinforces the investment thesis. As the cannabis industry matures, REFI's specialized expertise and prudent approach make it a standout player, capable of cultivating attractive yields for discerning investors.