10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2024

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-41123

 

CHICAGO ATLANTIC REAL ESTATE FINANCE, INC.

(Exact name of Registrant as specified in its charter)

 

Maryland

86-3125132

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1680 Michigan Avenue, Suite 700

Miami Beach, FL

33139

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (312) 809-7002

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

REFI

NASDAQ Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated Filer

Smaller reporting company

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

Outstanding at May 3, 2024

Common stock, $0.01 par value

19,100,282

 

 

 


 

CHICAGO ATLANTIC REAL ESTATE FINANCE, INC.

 

TABLE OF CONTENTS

 

INDEX

 

Part I.

Financial Information

1

Item 1.

Financial Statements (unaudited)

1

Consolidated Balance Sheets

1

Consolidated Statements of Income

2

Consolidated Statements of Equity

3

Consolidated Statements of Cash Flows

4

 

Notes to Consolidated Financial Statements (unaudited)

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.

Controls and Procedures

41

Part II.

Other Information

43

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3.

Defaults Upon Senior Securities

43

Item 4.

Mine Safety Disclosures

43

Item 5.

Other Information

43

Item 6.

Exhibits

44

 

i


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CHICAGO ATLANTIC REAL ESTATE FINANCE, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31, 2024

 

 

December 31, 2023

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Loans held for investment

 

$

359,317,126

 

 

$

337,238,122

 

Loans held for investment - related party (Note 7)

 

 

16,527,188

 

 

 

16,402,488

 

Loans held for investment, at carrying value

 

 

375,844,314

 

 

 

353,640,610

 

Current expected credit loss reserve

 

 

(5,356,018

)

 

 

(4,972,647

)

Loans held for investment at carrying value, net

 

 

370,488,296

 

 

 

348,667,963

 

Cash and cash equivalents

 

 

6,904,113

 

 

 

7,898,040

 

Other receivables and assets, net

 

 

5,143,318

 

 

 

705,960

 

Interest receivable

 

 

926,852

 

 

 

1,004,140

 

Related party receivables

 

 

192,354

 

 

 

107,225

 

Debt securities, at fair value

 

 

-

 

 

 

842,269

 

Total Assets

 

$

383,654,933

 

 

$

359,225,597

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Revolving loan

 

$

81,250,000

 

 

$

66,000,000

 

Dividend payable

 

 

9,007,244

 

 

 

13,866,656

 

Related party payables

 

 

1,819,428

 

 

 

3,243,775

 

Management and incentive fees payable

 

 

1,754,741

 

 

 

2,051,531

 

Accounts payable and other liabilities

 

 

1,342,872

 

 

 

1,135,355

 

Interest reserve

 

 

2,519,871

 

 

 

1,074,889

 

Total Liabilities

 

 

97,694,156

 

 

 

87,372,206

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

Common stock, par value $0.01 per share, 100,000,000 shares authorized and
   
19,100,282 and 18,197,192 shares issued and outstanding, respectively

 

 

191,003

 

 

 

181,972

 

Additional paid-in-capital

 

 

291,858,521

 

 

 

277,483,092

 

Accumulated deficit

 

 

(6,088,747

)

 

 

(5,811,673

)

Total stockholders' equity

 

 

285,960,777

 

 

 

271,853,391

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

383,654,933

 

 

$

359,225,597

 

 

The accompanying notes are an integral part of these consolidated financial statements.

1


 

CHICAGO ATLANTIC REAL ESTATE FINANCE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

 

 

For the three
months ended

 

For the three
months ended

 

 

 

March 31, 2024

 

March 31, 2023

 

Revenues

 

 

 

 

 

Interest income

 

$

15,343,667

 

$

16,527,304

 

Interest expense

 

 

(2,104,050

)

 

(1,618,296

)

Net interest income

 

 

13,239,617

 

 

14,909,008

 

 

 

 

 

 

Expenses

 

 

 

 

 

Management and incentive fees, net

 

 

1,754,741

 

 

2,138,005

 

General and administrative expense

 

 

1,390,267

 

 

1,274,825

 

Professional fees

 

 

449,858

 

 

569,375

 

Stock based compensation

 

 

531,293

 

 

138,335

 

Provision for current expected credit losses

 

 

380,279

 

 

96,119

 

Total expenses

 

 

4,506,438

 

 

4,216,659

 

Change in unrealized gain on debt securities, at fair value

 

 

(75,604

)

 

-

 

Realized gain on debt securities, at fair value

 

 

72,428

 

 

-

 

Net Income before income taxes

 

 

8,730,003

 

 

10,692,349

 

Income tax expense

 

 

-

 

 

-

 

Net Income

 

$

8,730,003

 

$

10,692,349

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

Basic earnings per common share

 

$

0.48

 

$

0.60

 

Diluted earnings per common share

 

$

0.47

 

$

0.60

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

Basic weighted average shares of common stock outstanding

 

 

18,273,919

 

 

17,879,444

 

Diluted weighted average shares of common stock outstanding

 

 

18,640,492

 

 

17,960,103

 

 

The accompanying notes are an integral part of these consolidated financial statements.

2


 

CHICAGO ATLANTIC REAL ESTATE FINANCE, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)

 

THREE MONTHS ENDED MARCH 31, 2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional
Paid-In-

 

 

Accumulated

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2023

 

 

18,197,192

 

 

$

181,972

 

 

$

277,483,092

 

 

$

(5,811,673

)

 

$

271,853,391

 

Issuance of common stock, net of offering costs

 

 

896,443

 

 

 

8,964

 

 

 

13,844,203

 

 

 

167

 

 

 

13,853,334

 

Stock-based compensation

 

 

6,647

 

 

 

67

 

 

 

531,226

 

 

 

-

 

 

 

531,293

 

Dividends declared on common shares ($.47 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(9,007,244

)

 

 

(9,007,244

)

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,730,003

 

 

 

8,730,003

 

Balance at March 31, 2024

 

 

19,100,282

 

 

$

191,003

 

 

$

291,858,521

 

 

$

(6,088,747

)

 

$

285,960,777

 

 

THREE MONTHS ENDED MARCH 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional
Paid-In-

 

 

Accumulated

 

 

Total
Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2022

 

 

17,685,952

 

 

$

176,859

 

 

$

268,995,848

 

 

$

(5,139,684

)

 

$

264,033,023

 

Issuance of common stock in connection
   with initial public offering and
   concurrent private placement, net of
   offering costs, underwriting discounts
   and commissions

 

 

395,779

 

 

 

3,958

 

 

 

5,790,959

 

 

 

-

 

 

 

5,794,917

 

Stock-based compensation

 

 

6,952

 

 

 

70

 

 

 

138,265

 

 

 

-

 

 

 

138,335

 

Dividends declared on common shares ($.47 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8,535,296

)

 

 

(8,535,296

)

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,692,349

 

 

 

10,692,349

 

Balance at March 31, 2023

 

 

18,088,683

 

 

$

180,887

 

 

$

274,925,072

 

 

$

(2,982,631

)

 

$

272,123,328

 

 

The accompanying notes are an integral part of these consolidated financial statements.

3


 

CHICAGO ATLANTIC REAL ESTATE FINANCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

For the three months
ended March 31,

 

 

 

 

2024

 

 

2023

 

 

Operating activities

 

 

 

 

 

 

 

Net income

 

$

8,730,003

 

 

$

10,692,349

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Accretion of deferred loan origination fees and other discounts

 

 

(477,756

)

 

 

(908,873

)

 

Paid-in-kind interest

 

 

(3,008,593

)

 

 

(2,256,228

)

 

Provision for current expected credit losses

 

 

380,279

 

 

 

96,119

 

 

Change in unrealized gain on debt securities, at fair value

 

 

75,604

 

 

 

-

 

 

Realized gain on debt securities, at fair value

 

 

(72,428

)

 

 

-

 

 

Amortization of debt issuance costs

 

 

90,915

 

 

 

167,304

 

 

Stock based compensation

 

 

531,293

 

 

 

138,335

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Interest receivable

 

 

77,288

 

 

 

(2,955,336

)

 

Other receivables and assets, net

 

 

(97,151

)

 

 

(19,507

)

 

Interest reserve

 

 

1,444,982

 

 

 

(1,648,129

)

 

Related party payables

 

 

(296,790

)

 

 

(127,389

)

 

Related party receivables

 

 

(85,129

)

 

 

(237,885

)

 

Proceeds from the redemption of debt securities, at fair value

 

 

839,094

 

 

 

-

 

 

Management and incentive fees payable

 

 

(1,424,347

)

 

 

(1,157,595

)

 

Accounts payable and accrued expenses

 

 

210,608

 

 

 

(81,098

)

 

Net cash provided by operating activities

 

 

6,917,872

 

 

 

1,702,067

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Issuance of and fundings of loans held for investment

 

 

(22,380,807

)

 

 

(32,941,660

)

 

Proceeds from sales of loans held for investment

 

 

-

 

 

 

13,399,712

 

 

Principal repayment of loans held for investment

 

 

3,663,452

 

 

 

44,858,834

 

 

Net cash (used in)/provided by investing activities

 

 

(18,717,355

)

 

 

25,316,886

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from sale of common stock

 

 

9,811,862

 

 

 

6,000,010

 

 

Proceeds from borrowings on revolving loan

 

 

28,000,000

 

 

 

28,500,000

 

 

Repayment of borrowings on revolving loan

 

 

(12,750,000

)

 

 

(49,000,000

)

 

Dividends paid to common shareholders

 

 

(13,866,656

)

 

 

(13,486,186

)

 

Payment of debt issuance costs

 

 

(49,738

)

 

 

(2,988

)

 

Payment of offering costs

 

 

(339,912

)

 

 

(104,711

)

 

Net cash provided by/(used in) financing activities

 

 

10,805,556

 

 

 

(28,093,875

)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(993,927

)

 

 

(1,074,922

)

 

Cash and cash equivalents, beginning of period

 

 

7,898,040

 

 

 

5,715,827

 

 

Cash and cash equivalents, end of period

 

$

6,904,113

 

 

$

4,640,905

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash financing and investing activities

 

 

 

 

 

 

 

Interest reserve withheld from funding of loans

 

$

2,032,688

 

 

$

-

 

 

OID withheld from funding of loans held for investment

 

 

105,081

 

 

 

1,118,340

 

 

Subscription receivable from sale of common stock

 

 

4,472,690

 

 

 

-

 

 

Dividends declared and not yet paid

 

 

9,007,244

 

 

 

8,667,701

 

 

Transfer of loan held for investment to loan held for sale

 

 

-

 

 

 

13,399,712

 

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

Interest paid during the period

 

$

1,786,333

 

 

$

1,363,742

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


 

CHICAGO ATLANTIC REAL ESTATE FINANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Chicago Atlantic Real Estate Finance, Inc., and its wholly owned consolidated subsidiary, Chicago Atlantic Lincoln LLC (“CAL”) (collectively the “Company”, “we”, or “our”), is a commercial mortgage real estate investment trust (“REIT”) incorporated in the state of Maryland on March 30, 2021. The Company has elected to be taxed as a REIT for United States federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2021. The Company generally will not be subject to United States federal income taxes on its REIT taxable income if it annually distributes to stockholders at least 90% of its REIT taxable income prior to the deduction for dividends paid and complies with various other requirements as a REIT.

The Company operates as one operating segment and its primary investment objective is to provide attractive, risk-adjusted returns for stockholders over time, primarily through consistent current income (dividends and distributions) and secondarily, through capital appreciation. The Company intends to achieve this objective by originating, structuring, and investing in first mortgage loans and alternative structured financings secured by commercial real estate properties. The Company’s loan portfolio is primarily comprised of senior loans to state-licensed operators in the cannabis industry, secured by real estate, equipment, receivables, licenses, and/or other assets of the borrowers to the extent permitted by applicable laws and regulations governing such borrowers. We also lend to and invest in companies or properties that are not related to the cannabis industry if they provide return characteristics consistent with our investment objective.

The Company is externally managed by Chicago Atlantic REIT Manager, LLC (the “Manager”), a Delaware limited liability company, pursuant to the terms of the management agreement dated May 1, 2021, as amended in October 2021, by and among the Company and the Manager (the "Management Agreement"). The Management Agreement had a three-year initial term that expired on April 30, 2024. After the initial term, the management agreement is automatically renewed for one-year periods unless the Company or the Manager elects not to renew in accordance with the terms of the Management Agreement. On April 30, 2024, the Management Agreement was automatically renewed. The Manager conducts substantially all of the Company’s operations and provides asset management services for its real estate investments. For its services, the Manager is entitled to earn management fees and incentive compensation, both defined in and in accordance with the terms of the Management Agreement (Note 7). All of the Company’s investment decisions are made by the investment committee of the Manager, subject to oversight by the Company’s board of directors (the “Board”). The Manager is wholly-owned by Chicago Atlantic Group, LP. (the “Sponsor”).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and related notes of the Company have been prepared on the accrual basis of accounting and in conformity with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Our consolidated financial statements present the financial position, results of operations, and cash flows of Chicago Atlantic Real Estate Finance, Inc., and its wholly owned consolidated subsidiary, Chicago Atlantic Lincoln, LLC. All intercompany accounts and transactions have been eliminated in consolidation. Accordingly, these financial statements may not contain all disclosures required by generally accepted accounting principles. Reference should be made to Note 2 of the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2023. In the opinion of the Company, all normal recurring adjustments have been made that are necessary to the fair statement of the results of operations and financial position as of and for the periods presented. Operating results for the three-month period ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

Cash and Cash Equivalents

The Company’s cash held with financial institutions may at times exceed the Federal Deposit Insurance Corporation (“FDIC”) insured limits. The Company and the Manager seek to manage this credit risk relating to cash by monitoring the financial stability of the financial institutions and their ability to continue in business for the foreseeable future.

Cash and cash equivalents include funds on deposit with financial institutions, including demand deposits with financial institutions. Cash and short-term investments with an original maturity of three months or less when acquired are considered cash and cash equivalents for the purpose of the consolidated balance sheets and consolidated statements of cash flows, and represented $6.9 million and $7.9 million of total cash and cash equivalents as of March 31, 2024 and December 31, 2023, respectively.

5


 

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. Significant estimates include the provision for current expected credit losses.

Revenue Recognition

Interest income on debt securities designated as trading securities is recognized on an accrual basis and is reported as interest receivable until collected. Interest income is accrued based on the outstanding face amount and the contractual terms of the securities. Original issue discount (“OID”), market discounts or premiums, if any, are recorded as an adjustment to the amortized cost and accreted or amortized as an adjustment to interest income using a method that approximates the effective interest method. Realized gains or losses on debt securities are measured by the difference between the net proceeds from the disposition and the amortized and/or accreted cost basis of the investment using the specific identification method without regard to unrealized gains or losses previously recognized, and include loans charged off during the period, net of recoveries.

Income Taxes

The Company is a Maryland corporation and has elected to be taxed as a REIT under the Code, commencing with the taxable year ended December 31, 2021. The Company believes that it qualifies as a REIT and that its method of operations will enable it to continue to qualify as a REIT. However, no assurances can be given that the Company’s beliefs or expectations will be fulfilled, since qualification as a REIT depends on the Company satisfying numerous asset, income and distribution tests which depends, in part, on the Company’s operating results.

To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that the Company distributes annually to its stockholders at least 90% of the Company’s REIT taxable income prior to the deduction for dividends paid. To the extent that the Company distributes less than 100% of its REIT taxable income in any tax year (taking into account any distributions made in a subsequent tax year under Sections 857(b)(9) or 858 of the Code), the Company will pay tax at regular corporate rates on that undistributed portion. Furthermore, if the Company distributes less than the sum of 1) 85% of its ordinary income for the calendar year, 2) 95% of its capital gain net income for the calendar year, and 3) any undistributed shortfall from its prior calendar year (the “Required Distribution”) to its stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then it is required to pay a non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed. The 90% distribution requirement does not require the distribution of net capital gains. However, if the Company elects to retain any of its net capital gain for any tax year, it must notify its stockholders and pay tax at regular corporate rates on the retained net capital gain. The stockholders must include their proportionate share of the retained net capital gain in their taxable income for the tax year, and they are deemed to have paid the REIT’s tax on their proportionate share of the retained capital gain and receive an income tax credit for such amount. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax. If it is determined that the Company’s estimated current year taxable income will be in excess of estimated dividend distributions (including capital gain dividend) for the current year from such income, the Company accrues excise tax on estimated excess taxable income as such taxable income is earned. The annual expense is calculated in accordance with applicable tax regulations.

FASB ASC Topic 740, Income Taxes (“ASC 740”), prescribes a recognition threshold and measurement attribute for the consolidated financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has analyzed its various federal and state filing positions and believes that its income tax filing positions and deductions are documented and supported for the taxable years ended December 31, 2023 and December 31, 2022. Based on the Company’s evaluation, there is no reserve for any uncertain income tax positions as of March 31, 2024. Accrued interest and penalties, if any, are included within accounts payable and other liabilities in the balance sheets.

Recent Accounting Pronouncements

 

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This guidance requires public entities to disclose significant expense categories and amounts for each reportable segment, along with information regarding the composition of "other segment items." Additionally, the guidance requires the disclosure of the title and position of the entity's Chief Operating Decision Maker (“CODM”), an explanation of how the CODM utilizes reported profit or loss measures to assess segment performance, and certain segment-related disclosures on an interim basis, which were previously required only annually. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, early adoption is permitted. The adoption of this guidance is not expected to have a

6


 

significant impact on our consolidated financial statements. The Company does not expect to early adopt and will add the necessary disclosures upon adoption.

In December 2023, the FASB issued ASU 2023-09—Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 improves the transparency of income tax disclosures related to rate reconciliation and income taxes. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. For entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2025. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments should be applied prospectively, however retrospective application is permitted. The Company is currently evaluating the impact of the update on the Company’s future consolidated financial statements.

 

3. LOANS HELD FOR INVESTMENT, NET

As of March 31, 2024 and December 31, 2023, the Company’s portfolio was comprised of loans to 28 and 27 borrowers, respectively, that the Company has the ability and intent to hold until maturity or payoff. The portfolio of loans held for investment are reported on the consolidated balance sheets at amortized cost. The Company’s aggregate loan commitments and outstanding principal were approximately $401.3 million and $378.8 million, respectively, as of March 31, 2024, and $377.6 million and $351.4 million, respectively as of December 31, 2023. During the three months ended March 31, 2024, the Company funded approximately $22.4 million in new loan principal.

As of March 31, 2024 and December 31, 2023, approximately 76.6% and 80.5%, respectively, of the Company’s portfolio was comprised of floating rate loans that pay interest at the Prime Rate plus an applicable margin, and were subject to Prime Rate ceilings and floors as disclosed in the tables below. The carrying value of these loans was approximately $287.7 million and $284.5 million as of March 31, 2024 and December 31, 2023, respectively.

The remaining 23.4% and 19.5% of the portfolio was comprised of fixed rate loans that had a carrying value of approximately $88.1 million and $69.1 million as of March 31, 2024 and December 31, 2023, respectively.

The following tables summarize the Company’s loans held for investment as of March 31, 2024 and December 31, 2023:

 

 

As of March 31, 2024

 

 

Outstanding Principal (1)

 

 

Original Issue Discount

 

 

Carrying
Value (1)

 

 

Weighted Average Remaining Life (Years) (2)

 

Senior Term Loans

 

$

377,576,334

 

 

$

(1,732,020

)

 

$

375,844,314

 

 

 

2.0

 

Current expected credit loss reserve

 

 

-

 

 

 

-

 

 

 

(5,356,018

)

 

 

 

Total loans held at carrying value, net

 

$

377,576,334

 

 

$

(1,732,020

)

 

$

370,488,296

 

 

 

 

 

 

As of December 31, 2023

 

 

Outstanding Principal (1)

 

 

Original Issue Discount

 

 

Carrying
Value (1)

 

 

Weighted Average Remaining Life (Years) (2)

 

Senior Term Loans

 

$

355,745,305

 

 

$

(2,104,695

)

 

$

353,640,610

 

 

 

2.1

 

Current expected credit loss reserve

 

 

-

 

 

 

-

 

 

 

(4,972,647

)

 

 

 

Total loans held at carrying value, net

 

$

355,745,305

 

 

$

(2,104,695

)

 

$

348,667,963

 

 

 

 

 

(1)
The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted original issue discount, deferred loan fees and other upfront fees. Outstanding principal balance includes capitalized PIK interest, if applicable.
(2)
Weighted average remaining life is calculated based on the carrying value of the loans as of March 31, 2024 and December 31, 2023, respectively.

The following tables present changes in loans held at carrying value as of and for the three months ended March 31, 2024 and 2023.

 

7


 

 

Principal

 

 

Original
Issue
Discount

 

 

Current
Expected
Credit Loss
Reserve

 

 

Carrying
Value (1)

 

Balance at December 31, 2023

 

$

355,745,305

 

 

$

(2,104,695

)

 

$

(4,972,647

)

 

$

348,667,963

 

New fundings

 

 

22,485,888

 

 

 

(105,081

)

 

 

-

 

 

 

22,380,807

 

Principal repayment of loans

 

 

(3,663,452

)

 

 

-

 

 

 

-

 

 

 

(3,663,452

)

Accretion of original issue discount

 

 

-

 

 

 

477,756

 

 

 

-

 

 

 

477,756

 

PIK Interest

 

 

3,008,593

 

 

 

-

 

 

 

-

 

 

 

3,008,593

 

Current expected credit loss reserve

 

 

-

 

 

 

-

 

 

 

(383,371

)

 

 

(383,371

)

Balance at March 31, 2024

 

$

377,576,334

 

 

$

(1,732,020

)

 

$

(5,356,018

)

 

$

370,488,296

 

 

(1)
The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted original issue discount, deferred loan fees and other upfront fees. Outstanding principal balance includes capitalized paid-in-kind (“PIK”) interest, if applicable.

 

Principal

 

 

Original
Issue
Discount

 

 

Current
Expected
Credit Loss
Reserve

 

 

Carrying
Value (1)

 

Balance at December 31, 2022

 

$

343,029,334

 

 

$

(3,755,796

)

 

$

(3,940,939

)

 

$

335,332,599

 

New fundings

 

 

34,060,000

 

 

 

(1,118,340

)

 

 

-

 

 

 

32,941,660

 

Principal repayment of loans

 

 

(45,754,443

)

 

 

-

 

 

 

-

 

 

 

(45,754,443

)

Accretion of original issue discount

 

 

-

 

 

 

908,873

 

 

 

-

 

 

 

908,873

 

Sale of loan (2)

 

 

(13,399,712

)

 

 

-

 

 

 

-

 

 

 

(13,399,712

)

PIK Interest

 

 

2,256,228

 

 

 

-

 

 

 

-

 

 

 

2,256,228

 

Current expected credit loss reserve

 

 

-

 

 

 

-

 

 

 

(110,995

)

 

 

(110,995

)

Balance at March 31, 2023

 

$

320,191,407

 

 

$

(3,965,263

)

 

$

(4,051,934

)

 

$

312,174,210

 

 

(1)
The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted original issue discount, deferred loan fees and other upfront fees. Outstanding principal balance includes capitalized PIK interest, if applicable.
(2)
One loan was reclassified as held for sale from loans held for investment as the decision was made to sell the loan during the three months ended March 31, 2023 to a syndicate of co-lenders which includes a third party and two affiliates under common control with our Manager. The sale was executed on March 31, 2023 (Note 7).

A more detailed listing of the Company’s loans held at carrying value based on information available as of March 31, 2024, is as follows:

8


 

Loan (1)

 

Location(s)

 

Initial
Funding
Date (1)

 

Maturity
Date (2)

 

Total
Commitment (3)

 

 

Principal
Balance

 

 

Original Issue Discount

 

 

Carrying
Value

 

 

Percentage
of Our
Loan
Portfolio

 

 

Future
Fundings

 

 

Interest Rate (4)

Periodic
Payment (5)

 

YTM
IRR (6)

1

 

Various

 

10/27/2022

 

10/30/2026

 

$

30,000,000

 

 

$

29,820,000

 

 

$

(579,713

)

 

$

29,240,287

 

 

 

7.8

%

 

 

-

 

 

P+6.5% Cash (11)

I/O

 

17.4%

2

 

Michigan

 

1/13/2022

 

12/31/2024

 

 

35,891,667

 

 

 

39,167,481

 

 

 

(60,915

)

 

 

39,106,565

 

 

 

10.4

%

 

 

-

 

 

P+6.65% Cash, 4.25% PIK (17)

P&I

 

18.0%

3(18)

 

Various

 

3/25/2021

 

11/29/2024

 

 

20,105,628

 

 

 

20,791,605

 

 

 

(45,680

)

 

 

20,745,924

 

 

 

5.5

%

 

 

-

 

 

P+10.38% Cash, 2.75% PIK (7)

P&I

 

23.5%

4

 

Arizona

 

4/19/2021

 

4/16/2024

 

 

14,240,129

 

 

 

16,091,216

 

 

 

-

 

 

 

16,091,216

 

 

 

4.3

%

 

 

-

 

 

15% PIK (15)

I/O

 

30.5%

5

 

Massachusetts

 

4/19/2021

 

4/30/2025

 

 

3,500,000

 

 

 

3,036,680

 

 

 

-

 

 

 

3,036,680

 

 

 

0.8

%

 

 

-

 

 

P+12.25% Cash (7)

P&I

 

22.8%

6

 

Michigan

 

8/20/2021

 

4/15/2024

 

 

6,000,000

 

 

 

4,611,348

 

 

 

-

 

 

 

4,611,348

 

 

 

1.2

%

 

 

-

 

 

P+9% Cash (7)

P&I

 

20.9%

7

 

Illinois, Arizona

 

8/24/2021

 

6/30/2025

 

 

26,002,665

 

 

 

20,663,292

 

 

 

(136,918

)

 

 

20,526,374

 

 

 

5.5

%

 

 

-

 

 

P+6% Cash, 2% PIK (12)

P&I

 

19.5%

8

 

West Virginia

 

9/1/2021

 

9/1/2024

 

 

9,500,000

 

 

 

12,094,954

 

 

 

(26,697

)

 

 

12,068,257

 

 

 

3.2

%

 

 

-

 

 

P+9.25% Cash, 2% PIK (8)

P&I

 

25.1%

9(19)

 

Pennsylvania

 

9/3/2021

 

6/30/2024

 

 

15,000,000

 

 

 

16,527,188

 

 

 

-

 

 

 

16,527,188

 

 

 

4.4

%

 

 

-

 

 

P+10.75% Cash, 3% PIK (7)

P&I

 

16.3%

11

 

Maryland

 

9/30/2021

 

9/30/2024

 

 

32,000,000

 

 

 

33,478,944

 

 

 

(178,986

)

 

 

33,299,958

 

 

 

8.9

%

 

 

-

 

 

P+8.75% Cash, 2% PIK (7)

I/O

 

22.0%

12

 

Various

 

11/8/2021

 

10/31/2024

 

 

20,000,000

 

 

 

8,710,222

 

 

 

(36,770

)

 

 

8,673,452

 

 

 

2.3

%

 

 

-

 

 

P+7% Cash (13)

P&I

 

19.5%

13

 

Michigan

 

11/22/2021

 

11/1/2024

 

 

13,600,000

 

 

 

13,279,539

 

 

 

(41,628

)

 

 

13,237,911

 

 

 

3.5

%

 

 

-

 

 

P+6% Cash, 1.5% PIK (12)

I/O

 

19.5%

14

 

Various

 

12/27/2021

 

12/27/2026

 

 

5,000,000

 

 

 

5,253,125

 

 

 

-

 

 

 

5,253,125

 

 

 

1.4

%

 

 

-

 

 

P+12.25% Cash, 2.5% PIK (9)

P&I

 

23.2%

16

 

Florida

 

12/30/2021

 

12/31/2024

 

 

13,000,000

 

 

 

4,232,500

 

 

 

(14,320

)

 

 

4,218,180

 

 

 

1.1

%

 

 

-

 

 

P+9.25% Cash (7)

I/O

 

35.7%

17

 

Florida

 

1/18/2022

 

1/31/2025

 

 

15,000,000

 

 

 

14,550,000

 

 

 

(105,341

)

 

 

14,444,659

 

 

 

3.8

%

 

 

-

 

 

P+4.75% Cash (11)

P&I

 

14.8%

18

 

Ohio

 

2/3/2022

 

2/28/2025

 

 

22,448,992

 

 

 

20,731,419

 

 

 

(72,670

)

 

 

20,658,749

 

 

 

5.5

%

 

 

-

 

 

P+1.75% Cash, 5% PIK (12)

P&I

 

16.4%

19

 

Florida

 

3/11/2022

 

12/31/2025

 

 

20,000,000

 

 

 

19,696,007

 

 

 

(41,819

)

 

 

19,654,188

 

 

 

5.2

%

 

 

-

 

 

11% Cash, 5% PIK

P&I

 

16.5%

20

 

Missouri

 

5/9/2022

 

5/30/2025

 

 

17,000,000

 

 

 

17,781,166

 

 

 

(64,682

)

 

 

17,716,484

 

 

 

4.7

%

 

 

-

 

 

11% Cash, 2% PIK

P&I

 

14.7%

21

 

Illinois

 

7/1/2022

 

7/29/2026