Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Chicago Atlantic Real Estate Finance, Inc. Third Quarter 2022 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Tripp Sullivan of SCR Partners. Mr. Sullivan, you may begin.

Thank you. Good morning. Welcome to the Chicago Atlantic Real Estate Finance Conference Call to review the company's results for the third quarter of 2022. On the call today will be John Mazarakis, Executive Chairman; Tony Cappell, Chief Executive Officer; Andreas Bodmeier, Co-President and Chief Investment Officer; and Phil Silverman, Interim 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 the 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, November 9, 2022, will not be updated subsequent 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 laws, 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 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 will also discuss certain non-GAAP measures including, but not limited to, distributable earnings and adjusted 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 John Mazarakis. Please go ahead.

Thanks, Tripp. Good morning, everyone, and thank you for joining us today. Throughout this year, we have stressed the importance of maintaining discipline in underwriting, loan documentation and loan monitoring. We have also continued to assess asset values in every state as state markets evolve monthly. Given the continued disruption in the capital markets, it is critical that we continue to rely on these aspects of our strategy that have made us successful so far being methodical, analytical and pragmatic. I want to remind again everyone the investment potential of this industry. Let's compare the performance of the cannabis market in the last 3 years to beer, wine, tobacco and pharmaceuticals. The revenue growth of these other industries from 2019 to '21 was in the low single digits, along with high single digits to low double-digit profit growth at best. The cannabis market, on the other hand, generated annual revenue growth in the mid-30% to low 50% range, along with mid-30% to 50% annual profit growth in the same period. Cannabis is an industry that has only just begun to grow and will continue to need significant growth capital. I would also highlight that U.S. retail sales estimates from stock book project cannabis sales to increase from $30 billion in 2022 to $53 billion by 2026 with Rhode Island approving adult use cannabis in May and its first retail store opening in early December and with Maryland being expected to move to adult use with the referendum this month, these estimates may, in fact, be conservative. I don't think we've seen the full impact of New Jersey or New York in those sales estimates either. I also think it is worth mentioning the SAFE Banking Act here briefly. There has been an increasing amount of speculation that something could get…

Good morning, everyone. I want to follow up on a point John made earlier about investment potential. As you might expect, we track pricing data and trends in every state in which we're invested, along with those where we are not invested. What we keep seeing in that data is there are a lot of headlines about pricing compression, but not much context beyond the headline. Without the context and analysis, all you might come away with is misguided impression of general operator distress. There have been some well-documented cases in the industry, but for the most part, we are seeing continued growth from our operators. The way we see it, success is defined differently in every state and not all prices are created equal. Here's a good example. The more competitive states such as Arizona, California, Colorado, Oregon, Washington and Michigan, have seen their average wholesale price per pound decreased from an average of $1,250 per pound in January to roughly $800 per pound in September. Other states such as Illinois, Maryland, Pennsylvania and Massachusetts have seen declined as well in the same period, but they've all stayed between $22.50 and $37.50 per pound, and the percentage declines haven't been as steep as the Western states. This is where the underwriting discipline and first mover experience in the industry count. When we look at underwriting cultivation, if an operator can produce at $400 per pound, then they are viable at even a wholesale price of $1,000 per pound. The same goes for a producer whose costs are $1,200 per pound in a market where wholesale pricing is between $2,500 and $3,000 per pound. For retail operations, we focus on sales per square foot. The current average across our portfolio is $3,000 per square foot. That's comparable to one at…

Thanks, Tony. At September 30, our loan portfolio has grown to total loan commitments of $349 million across 22 portfolio companies. It has a weighted average yield to maturity of 18.3%, up from 17.7% at June 30. New originations during the quarter were $5.7 million, comprised of $5 million through a new borrower with a $4 million commitment remaining and $680,000 incremental events to an existing borrower. As discussed on the Q2 earnings call, originations were expected to be low in Q3 due to the REIT's capital constraints. However, the Chicago Atlantic pipeline remains strong. And with the increase of the credit facility, we expect the REIT to be able to increase its loan originations in Q4. Subsequent to quarter end, we had the origination Tony mentioned earlier, which extended the maturity of a $30 million loan that the REIT holds until 2026. All loans are current and performing. Our portfolio is currently at about 60% floating rate based off of the prime rate. So we have been able to effectively manage the impact of rising rates. Last week's decision by the Federal Reserve to raise the Fed funds rate by another 75 basis points should result in another increase in portfolio yield in Q4. With our leverage expected to increase from 20% to 25% to 35% by year-end, the higher interest on the credit facility could potentially offset some of that yield in distributable earnings. I'll now turn it over to Phil to review our financial results.

Thank you, Andreas. Turning now to our financial results for the third quarter. As expected, net interest income continued to increase sequentially, up $1.5 million or 13.4% from Q2. The increase was primarily due to the 150 basis point increase in the prime rate during Q3, which impacted the 60% of our portfolio, which bears a floating rate. Additionally, the company benefited from a full quarter of interest recognition on our Q2 loan originations. Total operating expenses for the quarter were consistent with Q2 at approximately $2.9 million, which includes management and incentive fees of $1.3 million, aggregate G&A and professional fees of $1.4 million and stock-based compensation of approximately $100,000. The incentive and management fees were up sequentially in line with higher net interest income, while the other G&A and professional fee expenses were down nearly $100,000 as compared to prior quarter. We anticipate full year G&A will be approximately $3.5 million, which includes costs associated with our upsized credit facility, which were not capitalizable under GAAP. The incentive fees payed to our manager are calculated on a rolling 12-month basis. These incentive fees for the last 12 months as of Q3 less the fees paid and waived in the previous 3 quarters was approximately $519,000 in Q3 compared to approximately $599,000 in Q2. In Q4 2021, the manager granted an incentive fee waiver of approximately $1.1 million in connection with our IPO. This fee waiver from Q4 2021 will be excluded from the rolling 12-month calculation in Q4 2022. As a result, we expect an increase in the incentive fee for Q4 and a corresponding decrease to distributable earnings for the same period. As of quarter end, we increased our provision for expected credit losses by $300,000 or nearly $0.02 per weighted average diluted common share. Similar to last quarter, our reserve was increased based on a quarterly reevaluation of overall current macroeconomic conditions, including, for example, the rising rate environment as opposed to any company-specific factors impacting the credit quality of our borrowers. Nearly 96% of the portfolio continues to be fully secured by real estate and 4% is limited or no real estate collateral. Our portfolio on average had real estate collateral coverage of 1.9x as of September 30, 2022. The CECL reserve was added back to the calculation of distributable earnings consistent with prior quarters. The other adjustments to distributable earnings include stock-based compensation and depreciation and amortization, which amounted to $223,000 in Q3 compared to approximately $291,000 in Q2. Our adjusted distributable earnings per share was $0.58 per diluted share for Q3, up sequentially from $0.50 in Q2. Our book value as of September 30 was $15.23 per common share compared with $15.13 as of June 30. Operator, we're now ready to take questions.

[Operator Instructions] Our first question and comment comes from the line of Aaron Hecht from JMP Securities.

Congrats on getting that extra liquidity on the credit facility. I know you've been working on that for a while. When you look at your pipeline today, how is the investment yield changed across the landscape? I mean, obviously, there's been significant capital market volatility, interest rates are up. Are investment yields keeping up with the cost of capital increase that you guys are seeing for you and when you thing of the market?

Thanks for the question. Yes, the answer -- the quick answer is absolutely. We're seeing yields like going -- I don't have any expectation for those to subside anytime soon. Keep in mind that for the broader market, the increase in rates probably highlights the 300% to 400% increase from 0% to 4.25%. In our case, the increase is much smaller relative to the initial rate that the borrowers were paying before. So that is a key metric to kind of define stress in cannabis versus the broader market.

Okay. And then you guys guided to some higher leverage, I think, in the fourth quarter. Is that simply putting your commitments to work? Or do you have new deals lined up? And are you expecting to work with some more operators? Or is this working within your existing operators, let's say?

Yes. That would be right now earmarked for new deals. Obviously, from a commitment perspective, we have the ability to fund that. But there's no expectations for any of that to be drawn in the near term. So that's really more new operators and kind of at higher returns.

Our next question or comment comes from the line of Gaurav Mehta from EF Hutton.

I wanted to ask on some expense items. You talked about G&A expectations of $3.5 million, which is at the higher end of your prior expectation of $2.5 million to $3.5 million as you mentioned, cost of upsized credit facility. But outside of that, are there any other items that brought G&A to the higher end? And then I guess as you think about the run rate of G&A, and how should we think about that?

Gaurav, thanks for the question. Yes, as you correctly pointed out, we increased our G&A guidance slightly to about the $3.5 million. And as you also correctly pointed out, we dedicated substantial internal resources of our manager rather than an investment bank or a third party during Q3 to pursue and sourced the increase commitments on the upsized credit facility. And so that's really the significant driver of the increase in Q3 and therefore, the run rate for the year. Those presumably are onetime cost, although we continue to pursue further increases to the total commitments on that facility, as we've noted. I think the Q2 expense numbers are indicative of our run rate going forward.

Okay. Maybe on your guidance of distributable earnings. I was curious if you could help us understand maybe the variance between the 4Q earnings as implied by the guidance versus 3Q, it seems like 4Q would be lower than 3Q. I know earlier you said higher incentive fee, but I guess outside of that, are there any other items that are bringing 4Q earnings lower than 3Q?

No, it's really predominantly, the incentive fee. It is a fairly substantial difference in the nature of the way it's calculated. We've explained that in our prepared remarks. That will drive distributable earnings down slightly. We have not forecasted any additional rate hikes from the Fed beyond what's occurred through today. So that is not contemplated in our calculations. We expect expenses and other operations of the company to remain relatively consistent through the fourth quarter.

[Operator Instructions] Our next question or comment comes from the line of Mark Smith from Lake Street Capital Markets.

A couple from me. First, any outlook really into repayments or anything that we should have on our radar that could be coming up that changes portfolio a little bit?

Yes. We just have one deal that is set to mature in Q4. And again, it's not that big. Well, our expectation is we will be able to roll that into a new deal at a higher return. Now if that does pay down, we are very confident that, that can be put to work in short order. Other than that, there are really no expectations of payoffs.

Perfect. Then as we look at kind of structuring of new deals, any pushback any issues as you guys look at continued move to floating rates as well as kind of getting the real estate collateral that you look for in mid?

So yes, we're trying to pick the best of the best deals. We've been able to increase our floating percentage -- the floating percentage of the portfolio from 60% to the low 70%. So we're very mindful of not committing to any fixed loans. And we're actively pursuing converting any fixed loans to floating loans. So collateral obviously has become top of mind and creditworthiness in general has been what we've been sorting after -- in the last couple of quarters since the rates started to increase. We have not -- I mean, obviously, borrowers will always push back regarding of the conditions -- regardless of the conditions. So nothing new to report on that front.

Okay. And then last one for me. You mentioned it a little bit in your comments, but as we look at Missouri and Maryland, looking positive here for legalization. Either of those that you really think maybe change your outlook that are good growth opportunities and then maybe not looking at a full lame duck session here. Does that reduce the risk or reduce the odds maybe of getting SAFE Act or anything else passed here over the next few months?

The truth thing is that we were expecting those 2 states to flip because of the overwhelming support by voters. So we were actively pursuing deals in those states, and we've actually made -- we're in the process of closing deals in those states. So yes, net-net positive, great story for both states. It's a win-win for everyone.

Thank you. There appears to be no additional questions in the queue. I'd like to turn the conference back over to Mr. Mazarakis for any closing remarks.

Well, thank you very much. I wanted to thank everyone. We feel that we put another good quarter up for scrutiny by the group. And we're going to continue to do what we do and hopefully deliver more quarters like this one. Have a wonderful day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.