Chicago Atlantic's Q3 2025: Contradictions Emerge on Pipeline, Prepayment Deployment, and Leverage Expectations

Date of Call: None provided

Financials Results

• EPS: $0.50 basic and $0.49 diluted distributable earnings per weighted average share for Q3, modest decrease from $0.52 basic / $0.51 diluted in Q2

Guidance:

• Maintain dividend payout ratio of 90%–100% of basic distributable earnings for the 2025 tax year; may issue a special fourth-quarter dividend if taxable income requires additional distributions.
• Targeting net growth in the loan portfolio for the year; current gross originations pace supports that objective.
• Preserve liquidity and capacity: approximately $69.1M available on senior credit facility and ~ $63.0M total liquidity net of estimated liabilities as of the call.

Business Commentary:

• Consistent Performance Amidst Volatile Market:
• Chicago Atlantic Real Estate Finance demonstrated another consistent period of execution and performance, achieving gross originations that keep them on track to hit their goal of net growth in the loan portfolio.

• This consistency was driven by their disciplined focus on principal protection and the benefits of their approach, which has yielded strong results despite the volatile private credit environment.

• Pipeline and Origination Activity:

• The company's cannabis pipeline currently stands at approximately $441 million, featuring opportunities in growth investments, maturities, M&A, and ESOP transactions.

• The robust pipeline is a result of their focus on limited license jurisdictions and diversified investment opportunities.

• Loan Portfolio and Interest Rate Protection:

• As of September 30, the loan portfolio totaled approximately $400 million, with 36.7% fixed rate loans and 63.3% floating rate loans.
• The majority of floating rate loans are protected by interest rate floors, shielding the portfolio from further rate declines. This structural advantage positions Chicago Atlantic favorably compared to most mortgage REITs.

• Leverage and Liquidity Management:
• Total leverage equaled 33% of book equity at September 30, and liquidity net of estimated liabilities was approximately $63 million

• Effective management of leverage and liquidity is crucial for maintaining financial flexibility and supporting growth in the loan portfolio.

• Capital Deployment and Share Repurchases:

• The management team and Board of Directors purchased shares on the open market, bringing their collective ownership to nearly 1,800,000 shares on a fully diluted basis.
• This move was motivated by confidence in the company's cannabis pipeline and the belief that the current discount to book value presented a favorable opportunity for share repurchases.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • "demonstrate another consistent period of execution"; management: "benefits of our consistent approach and disciplined focus on principal protection yielded a strong quarter"; "on pace to hit our goal of net growth in the loan portfolio"; management and board repurchased shares; distributable earnings per share of $0.50.

Q&A:

• Question from Aaron Grey (Alliance Global Partners): First, can you comment on the pipeline — was there a large potential origination that exited the pipeline and are ESOP opportunities still appealing?
  Response: ESOPs remain a large part of the $441M pipeline; no material exits—pipeline experiences routine quarter-to-quarter churn.

• Question from Aaron Grey (Alliance Global Partners): For loans maturing before year-end, how are conversations progressing and will you hit net portfolio growth for the year?
  Response: We are negotiating extensions and expect the vast majority of loans maturing this year to be retained in some form, supporting our net growth target.

• Question from Aaron Grey (Alliance Global Partners): How do you view Virginia as a market if legalization or a more pro-cannabis government emerges?
  Response: Virginia is viewed as an attractive medical and prospective recreational market due to controlled licensure; we will extend relationships and deploy capital as opportunities arise.

• Question from Chris Muller (Citizen Capital Markets): What drives your underwriting success — borrower type, geographies, or other factors?
  Response: Underwriting is market-by-market and supply-chain specific: focus on limited-license jurisdictions, diversified operator revenues, conservative leverage (<2x EBITDA), real-estate collateral and loan amortization to protect principal.

• Question from Chris Muller (Citizen Capital Markets): If rescheduling/reform occurs, what normalized LTV would you expect in the portfolio?
  Response: Unclear — rescheduling could increase cash flows (supporting larger loans) and also raise valuations (increasing collateral values), so net LTV impact is ambiguous; we underwrite on debt-service ability.

• Question from Chris Muller (Citizen Capital Markets): Did you say 86% of the portfolio has active rate floors in place?
  Response: Yes — 86% of the portfolio is either fixed rate or protected by rate floors (combination of fixed and floored exposures).

• Question from Pablo Zuanic (Zuanic and Associates): Would Chicago Atlantic consider investing outside cannabis given peers are diversifying?
  Response: Occasionally, but the risk-reward for cannabis real-estate-backed loans is generally more attractive; the firm’s core focus and strategy remain cannabis-specialized.

• Question from Pablo Zuanic (Zuanic and Associates): How do you factor uncertain tax provisions (280E liabilities) into debt-service ability?
  Response: We treat uncertain tax liabilities as additional leverage and include covenants that limit such liabilities relative to our comfort with the borrower's total leverage profile.

• Question from Pablo Zuanic (Zuanic and Associates): Why provide a $75M three-year revolver to Verano instead of restructuring the larger outstanding facility due next year?
  Response: We value the Verano relationship and tailored financing reflects the partner’s needs; we support them as appropriate but did not disclose broader restructuring details.

• Question from Pablo Zuanic (Zuanic and Associates): Is competition from regional banks in the cannabis lending market increasing?
  Response: Yes — banks that invested in expertise have expanded disciplined deployments; we view banks as partners and co-lenders and welcome their role in the ecosystem.

• Question from Pablo Zuanic (Zuanic and Associates): Update on New York Social Equity Fund lending — why haven't they drawn more capital as stores grow?
  Response: The New York Social Equity Fund funded construction of ~23 stores but has paused additional deployments; we remain ready to support them if they resume draws.

Contradiction Point 1

Pipeline Trends and Size

It reveals differing perspectives on the pipeline size and growth, which could influence investor expectations and strategic planning.

Can you explain the decline in the pipeline to $441 million compared to prior quarters? Were there large potential originations that exited the pipeline? - Aaron Grey (Alliance Global Partners)

2025Q3: The pipeline's decline is due to ordinary quarterly turnaround, with no significant exits. ESOPs continue to be a large part of the pipeline. - Peter Sack(CEO)

What drove the sequential increase in the pipeline for Chicago Atlantic Real Estate Finance? - Aaron Grey (Alliance Global Partners)

2025Q2: Pipeline growth is driven by increased market activity, particularly M&A, operational reorganizations, ESOP transactions, and to a lesser extent, refinancings of existing debt. - Peter Sack(CEO)

Contradiction Point 2

Prepayment Expectations and Deployment

It involves differing expectations regarding prepayments and how the capital from these prepayments is to be redeployed, impacting financial projections and strategies.

What are your thoughts on opportunities in Virginia with a pro-cannabis government? - Aaron Grey (Alliance Global Partners)

2025Q3: Prepayments are unpredictable but can be both good and bad. They're a marker of portfolio success but also indicate capital to be redeployed. - Peter Sack(CEO)

How do you view prepayments in the remaining portfolio and how will proceeds from prepaid loans be reinvested? - Aaron Grey (Alliance Global Partners)

2025Q2: The recent prepayments were larger than expected but not necessarily a bad timing given current pipeline opportunities. - Peter Sack(CEO)

Contradiction Point 3

Leverage Expectations and Market Demand

It involves changes in financial forecasts, specifically regarding leverage expectations and market demand, which are critical indicators for investors and stakeholders.

What normalized LTV level do you expect in the portfolio if reform occurs this year or next year? - Chris Muller(Citizen Capital Markets)

2025Q3: We don't expect to increase leverage in the near term beyond that, which is already approved under our senior secured facility and its accordion feature. - Peter Sack(CEO)

What are your expectations for loan demand and leverage in light of fourth-quarter originations, the new unsecured term loan, current low leverage, and the ~$500 million pipeline? Will you raise leverage further to fund loans or use the ATM? How is borrowing demand shaping up overall? - Crispin Love(Piper Sandler)

2024Q4: I'd say on market demand, in a compressed equity valuation environment, the profile of demand has changed, but from the type of projects and the type of initiatives that were being funded 4 years ago. But I think that's been offset. The change of that profile has been more than offset by just the maturation of the industry and the sheer -- much larger size of the industry today than there was -- than it was 4 years ago. - Peter Sack(CEO)

Contradiction Point 4

Views on Scheduling and Market Timing

It involves changes in strategic perspectives, particularly regarding the timing and expectations of federal scheduling, which are crucial for business planning and investment decisions.

Have you observed increased competition from regional banks amid regulatory challenges? - Pablo Zuanic(Zuanic & Associates)

2025Q3: Our posture is to invest -- as always, to invest assuming a catalyst such as rescheduling never occurs. - Peter Sack(CEO)

Can you provide an update on your scheduling timeline and any changes to the 2025 expectation mentioned last quarter? - Crispin Love(Piper Sandler)

2024Q4: I think our posture is to invest -- as always, to invest assuming a catalyst such as rescheduling never occurs. - Peter Sack(CEO)

Contradiction Point 5

Pipeline and Loan Dynamics

It involves the interpretation of the company's pipeline and loan dynamics, which are crucial for understanding the company's prospects and financial health.

Can you explain the pipeline's decline to $441 million compared to prior quarters? Were large potential originations removed from the pipeline? - Aaron Grey (Alliance Global Partners)

2025Q3: The pipeline's decline is due to ordinary quarterly turnaround, with no significant exits. ESOPs continue to be a large part of the pipeline. There's refresh with deals either disappearing, being turned down, or getting funded. - Peter Sack(CEO)

What's the status of your current pipeline? How many late-stage opportunities are active, and what are their key characteristics? - Aaron Grey (Alliance Global Partners)

2025Q1: Pipeline is generally related to CapEx, with deployments expected to accelerate in Q2 and Q3. Specific details aren't provided, but the pipeline stands at $462 million, reflecting a healthy outlook. - Peter Sack(CEO)