CHICAGO ATLANTIC REAL ESTATE FINANCE, INC. (Exact name of Registrant as specified in its charter)" This is the title of the annual report filed by Chicago Atlantic Real Estate Finance, Inc. with the Securities and Exchange Commission (SEC) on Form 10-K.
Chicago Atlantic Real Estate Finance, Inc. (REFI) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2024. The report does not provide specific financial figures, main events, or significant developments, as it appears to be a placeholder or a preliminary filing. However, it does provide some general information about the company, including its name, address, and securities registered with the Securities and Exchange Commission (SEC). The report also indicates that REFI is a smaller reporting company and an emerging growth company, and that it has not elected to use the extended transition period for complying with new or revised financial accounting standards.
Overview
Chicago Atlantic Real Estate Finance, Inc. (REFI) is a commercial mortgage real estate investment trust (REIT) that primarily originates and invests in senior secured loans to state-licensed cannabis operators. The company’s primary investment objective is to provide attractive, risk-adjusted returns for stockholders through consistent current income dividends and capital appreciation.
REFI operates as an externally managed REIT and has elected to be taxed as a REIT for U.S. federal income tax purposes starting in 2021. The company is focused on financing senior secured loans and other types of loans for established state-licensed cannabis operators, with the loans generally secured by real estate, equipment, licenses and other assets.
Financial Performance
For the year ended December 31, 2024, REFI reported net income of $37.0 million, down 4% from $38.7 million in 2023. This decrease was primarily driven by a $0.8 million decline in gross interest income, which was partially offset by a $1.4 million increase in interest expense.
The decrease in interest income was due to a 100 basis point decline in the Prime Rate during 2024, which impacted the company’s floating rate loans that comprised 62.1% of the portfolio as of December 31, 2024. Additionally, REFI recognized $3.2 million in prepayment fees and accelerated original issue discount (OID) income in 2024, compared to $3.5 million in 2023. The weighted average yield-to-maturity internal rate of return (YTM IRR) on the portfolio decreased from 19.4% to 17.2% during the year.
Interest expense increased primarily due to $1.0 million in interest on $50 million of new senior unsecured notes issued in Q4 2024, as well as higher average borrowings under the company’s revolving credit facility. Management and incentive fees decreased by $0.7 million, while general and administrative expenses and professional fees were relatively flat year-over-year.
REFI’s provision for current expected credit losses (CECL) decreased by $1.5 million in 2024 compared to 2023, driven by improvements in the macroeconomic environment and portfolio risk composition. As of December 31, 2024, the CECL reserve represented approximately 105 basis points of the aggregate loan commitments.
Loan Portfolio
As of December 31, 2024, REFI’s loan portfolio consisted of 30 loans held for investment with a total carrying value of $402.5 million, up from 27 loans with a carrying value of $353.6 million at the end of 2023. The outstanding principal balance of the portfolio increased to $404.7 million from $355.7 million over the same period.
The portfolio was comprised of 62.1% floating-rate loans and 37.9% fixed-rate loans as of December 31, 2024, compared to 80.5% floating-rate and 19.5% fixed-rate at the end of 2023. The weighted average YTM IRR on the portfolio decreased from 19.4% to 17.2% during 2024.
In terms of risk ratings, 71.2% of the loans were rated “1” or “2” (very low to low risk) as of December 31, 2024, up from 68.9% at the end of 2023. The company made $161.3 million in new loan fundings during 2024, while receiving $121.5 million in total proceeds from loan sales, principal repayments and amortization.
Strengths and Weaknesses
A key strength of REFI’s business model is its focus on providing financing to established, state-licensed cannabis operators, which the company believes offers attractive risk-adjusted returns. The company’s loans are substantially secured by real estate, equipment, licenses and other assets, which helps mitigate credit risk. REFI also benefits from the growing demand for capital in the cannabis industry as more states legalize the drug.
However, REFI’s performance is sensitive to changes in market interest rates, as a majority of its loans have floating interest rates. Rising rates could compress the company’s net interest margin if borrowing costs increase faster than yields on its assets. The company is also exposed to cybersecurity risks given its reliance on information technology systems, although it has implemented measures to manage these risks.
Outlook and Conclusion
Looking ahead, REFI expects the principal amount of loans it originates to continue increasing as the cannabis industry expands. The company plans to raise additional equity and debt capital to fund this growth, including through its $500 million shelf registration statement and $75 million at-the-market (ATM) offering program.
Overall, REFI appears to be well-positioned to capitalize on opportunities in the cannabis lending market, with a diversified portfolio of secured loans to established operators. While the company faces interest rate and cybersecurity risks, its focus on risk management and conservative underwriting should help it navigate these challenges. If REFI can maintain its strong credit performance and continue growing its loan book, it should be able to deliver attractive risk-adjusted returns to shareholders over the long term.
