Chicago Atlantic Real Estate Finance Inc

Previous wording

Our Manager and its affiliates seek to originate real estate loans between $5 million and $200 million, generally with one- to five-year terms and amortization when terms exceed three years. We generally act as co-lenders in such transactions and intend to hold up to $50 million of the aggregate loan amount, with the remainder to be held by affiliates or third party co-investors. We may revise such concentration limits from time to time as our loan portfolio grows. Other investment vehicles managed by our Manager or affiliates of our Manager may co-invest with us or hold positions in a loan where we have also invested, including by means of splitting commitments, participating in loans or other means of syndicating loans. We will not engage in a co-investment transaction with an affiliate where the affiliate has a senior position to the loan held by us. To the extent that an affiliate provides financing to one of our borrowers, such loans will be working capital loans or loans that are subordinate to our loans. We may also serve as co-lenders in loans originated by third parties and, in the future, we may also acquire loans or loan participations. Loans that have one to two year maturities are generally interest only loans.

Current wording

Our Manager and its affiliates seek to originate real estate loans between $5 million and $200 million, generally with one- to five-year terms and amortization when terms exceed three years. We generally act as co-lenders in such transactions and intend to hold up to $50 million of the aggregate loan amount, with the remainder to be held by affiliates or third party co-investors. We may revise such concentration limits from time to time as our loan portfolio grows. Other investment vehicles managed by our Manager or affiliates of our Manager may co-invest with us or hold positions in a loan where we have also invested, including by means of splitting commitments, participating in loans or other means of syndicating loans. We will not engage in a co-investment transaction with an affiliate where the affiliate has a senior position to the loans held by us. To the extent that an affiliate provides financing to one of our borrowers, such loans will be working capital loans or loans that are subordinate to our loans. We may also serve as co-lenders in loans originated by third parties and, in the future, we may also acquire loans or loan participations. Loans that have one to two year maturities are generally interest only loans.

Previous wording

Our loans are secured by real estate and, in addition, when lending to owner-operators in the cannabis industry, other collateral, such as equipment, receivables, licenses or other assets of the borrowers to the extent permitted by applicable laws and regulations. In addition, we seek to impose strict loan covenants and seek personal or corporate guarantees for additional protection. As of June 30, 2024 and December 31, 2023, 24.0% and 27.1%, respectively, of the principal of loans held in our portfolio are backed by personal or corporate guarantees. We aim to maintain a portfolio diversified across jurisdictions and across verticals, including cultivators, processors, dispensaries, as well as ancillary businesses. In addition, we may invest in borrowers that have equity securities that are publicly traded on the Canadian Stock Exchange (“CSE”) in Canada and/or over-the-counter in the United States.

Current wording

Our loans are secured by real estate and, in addition, when lending to owner-operators in the cannabis industry, other collateral, such as equipment, receivables, licenses or other assets of the borrowers to the extent permitted by applicable laws and regulations. In addition, we seek to impose strict loan covenants and seek personal or corporate guarantees for additional protection. As of September 30, 2024 and December 31, 2023, 20.2% and 27.1%, respectively, of the principal of loans held in our portfolio are backed by personal or corporate guarantees. We aim to maintain a portfolio diversified across jurisdictions and across verticals, including cultivators, processors, dispensaries, as well as ancillary businesses. In addition, we may invest in borrowers that have equity securities that are publicly traded on the Canadian Stock Exchange (“CSE”) in Canada and/or over-the-counter in the United States.

Previous wording

We generate revenue primarily in the form of interest income on loans. As of June 30, 2024 and December 31, 2023, approximately 76.4% and 80.5%, respectively, of our portfolio was comprised of floating rate loans, and 23.6% and 19.5% of our portfolio was comprised of fixed rate loans, respectively. The floating rate loans described above are variable based upon the Prime Rate plus an applicable margin, and in many cases, a Prime Rate floor.

Current wording

We generate revenue primarily in the form of interest income on loans. As of September 30, 2024 and December 31, 2023, approximately 62.8% and 80.5%, respectively, of our portfolio was comprised of floating rate loans, and 37.2% and 19.5% of our portfolio was comprised of fixed rate loans, respectively. The floating rate loans described above are variable based upon the Prime Rate plus an applicable margin, and in many cases, a Prime Rate floor.

Previous wording

To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute annually to our stockholders at least 90% of our REIT taxable income prior to the deduction for dividends paid. To the extent that we distribute less than 100% of our 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), we will pay tax at regular corporate rates on that undistributed portion. Furthermore, if we distribute less than the sum of 1) 85% of our ordinary income for the calendar year, 2) 95% of our capital gain net income for the calendar year, and 3) any undistributed shortfall from our prior calendar year (the “Required Distribution”) to our stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are 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 we elect to retain any of our net capital gain for any tax year, we must notify our stockholders and pay tax at regular corporate rates on the retained net capital gain. Our 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. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax. If it is determined that our estimated current year taxable income will be in excess of estimated dividend distributions (including capital gain dividend) for the current year from such income, we will accrue excise tax on estimated excess taxable income as such taxable income is earned. The annual expense is calculated in accordance with applicable tax regulations. Excise tax expense, if any, is included in the line item, income tax expense. For the six months ended June 30, 2024, we did not incur excise tax expense.

Current wording

To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute annually to our stockholders at least 90% of our REIT taxable income prior to the deduction for dividends paid. To the extent that we distribute less than 100% of our 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), we will pay tax at regular corporate rates on that undistributed portion. Furthermore, if we distribute less than the sum of 1) 85% of our ordinary income for the calendar year, 2) 95% of our capital gain net income for the calendar year, and 3) any undistributed shortfall from our prior calendar year (the “Required Distribution”) to our stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are 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 we elect to retain any of our net capital gain for any tax year, we must notify our stockholders and pay tax at regular corporate rates on the retained net capital gain. Our 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. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax. If it is determined that our estimated current year taxable income will be in excess of estimated dividend distributions (including capital gain dividend) for the current year from such income, we will accrue excise tax on estimated excess taxable income as such taxable income is earned. The annual expense is calculated in accordance with applicable tax regulations. Excise tax expense, if any, is included in the line item, income tax expense. For the nine months ended September 30, 2024, we did not incur excise tax expense.

Previous wording

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We will be subject to interest rate risk in connection with our assets and our related financing obligations.

Current wording

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We will be subject to interest rate risk in connection with our assets and our related financing obligations. During the third quarter, the prime rate decreased by 50 basis points from 8.50% as of June 30, 2024 to 8.00% as of September 30, 2024. As of September 30, 2024, 43.1% of the Company's loan portfolio bears a fixed interest rate or has a prime rate floor equal to or greater than that prevailing prime rate.

Previous wording

These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations. As of June 30, 2024, 82.0% of our floating rate loans, based on principal outstanding have interest rate floors, and one loan is subject to an interest rate cap (Note 3).

Current wording

These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations. As of September 30, 2024, 94.3% of our floating rate loans, based on principal outstanding have interest rate floors, and one loan is subject to an interest rate cap (Note 3) as shown below:

Previous wording

Updates to Our Loan Portfolio during the Second Quarter of 2024

Current wording

Updates to Our Loan Portfolio during the Third Quarter of 2024

Previous wording

As described in Note 3, Loan #9 remains on non-accrual status and the Company will continue to cease further recognition of income until such events of default are cured or obligations are repaid. As of June 30, 2024, Loan #9 is held on the consolidated balance sheet as a loan held for investment – related party with a carrying value of approximately $16.4 million and a reserve for current expected credit losses of approximately $1.7 million.

Current wording

As described in Note 3, Loan #9 remains on non-accrual status and the Company will continue to cease further recognition of income until such events of default are cured or obligations are repaid. As of September 30, 2024, Loan #9 is held on the consolidated balance sheet as a loan held for investment – related party with a carrying value of approximately $16.4 million and a reserve for current expected credit losses of approximately $1.4 million.

Previous wording

During the three months ended June 30, 2024, we declared an ordinary cash dividend of $0.47 per share of our common stock, relating to the second quarter of 2024, which was paid on July 15, 2024 to stockholders of record as of the close of business on June 28, 2024. The total amount of the cash dividend payment was approximately $9.3 million.

Current wording

During the three months ended September 30, 2024, we declared an ordinary cash dividend of $0.47 per share of our common stock, relating to the third quarter of 2024, which was paid on October 15, 2024 to stockholders of record as of the close of business on September 30, 2024. The total amount of the cash dividend payment was approximately $9.3 million.

Previous wording

Interest income increased by approximately $0.4 million, or 2%, during the quarter ended June 30, 2024, compared to the quarter ended June 30, 2023. The increase in interest income was driven primarily from the increase in the average outstanding principal balance of loans during the comparable period which increased from $319.0 million for the three months ended June 30, 2023 to $380.4 million for the three months ended June 30, 2024. Additionally, the Prime Rate increased from 8.25% as of June 30, 2023 to 8.50% as of June 30, 2024, increasing the yield on the portion of the portfolio that bears a floating rate. The increase was offset by a decrease in the weighted average portfolio yield from 19.2% to 18.7% during the comparable periods.

Current wording

Interest income increased by approximately $1.1 million, or 7%, during the quarter ended September 30, 2024, compared to the quarter ended September 30, 2023. The increase in interest income was driven primarily from the increase in the average outstanding principal balance of loans during the comparable period which increased from $329.9 million for the three months ended September 30, 2023 to $372.8 million for the three months ended September 30, 2024. The increase was offset by a decrease in the weighted average portfolio yield from 19.3% to 18.3% during the comparable periods.

Previous wording

Net interest income decreased approximately $0.5 million, or 4%, over the comparative period. The decrease was attributable to the increase in interest expense driven by the timing of borrowings and an increase in the outstanding balance on the Revolving Loan, which bears interest at the Prime Rate plus an Applicable Margin. The outstanding balance on the Revolving Loan was approximately $76.8 million and $43.0 million, as of June 30, 2024 and 2023, respectively. The impact of the increase in interest expense was partially offset by the increase in interest income as explained above.

Current wording

Interest expense increased by approximately $0.4 million, or 24%, over the comparative period. The increase was attributable to the timing of borrowings and an increase in the outstanding balance on the Revolving Loan, which bears interest at the Prime Rate plus 25 basis points as of September 30, 2024, compared to the Prime Rate plus 0 basis points as of September 30, 2023. Additionally, the weighted average outstanding balance on the Revolving Loan was approximately $76.4 million and $59.0 million, as of September 30, 2024, and 2023, respectively, further contributing to the increase in interest expense.

Previous wording

General and administrative expenses and professional fees decreased by approximately $155 thousand for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. The decrease was primarily due to a decrease in professional fees in the second quarter of 2024. Overhead reimbursements for costs incurred by the Manager on behalf of the Company decreased by at approximately $105 thousand over the comparative period.

Current wording

General and administrative expenses and professional fees decreased by approximately $22 thousand for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023. The decrease was primarily due to a decrease in professional fees in the third quarter of 2024.

Previous wording

Stock based compensation expense increased by approximately $0.6 million for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. The increase over the comparable period is driven by the incremental expense recognized on the 187,335 restricted stock awards granted to employees of our Manager on April 1, 2024.

Current wording

Stock based compensation expense increased by approximately $0.3 million for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023. The increase over the comparable period is driven by the incremental expense recognized on the 187,335 restricted stock awards granted to employees of our Manager on April 1, 2024.

Previous wording

Reversal for current expected credit losses was $275 thousand in the three months ended June 30, 2024, as compared to a provision for current expected credit losses of $1.1 million in the three months ended June 30, 2023. Our provision for current expected credit losses decreased due to both borrower specific credit factors and regular re-evaluations of overall current macroeconomic conditions affecting our borrowers and the industry. Additionally, the original portfolio has matured since June 30, 2023, though the weighted average remaining life of the total loan portfolio has remained consistent at 1.8 years as of June 30, 2023 and 2024. Our reserves for performing loans generally decrease as they approach maturity.

Current wording

Reversal for current expected credit losses was approximately $1.0 million in the three months ended September 30, 2024, as compared to a reversal of $41 thousand in the three months ended September 30, 2023. Our provision for current expected credit losses decreased due to both borrower specific credit factors and portfolio composition as a result of the approximately $32.3 million in principal repayments during the third quarter of 2024. Additionally, during the third quarter of 2024, the Company transferred $13.0 million of principal of Loan #2 from loans held for investment to loans held for sale, and reversed approximately $0.2 million of the CECL reserve in connection with the transfer. Additionally, the original portfolio has matured since September 30, 2023, with the weighted average remaining life of the total loan portfolio decreasing to 2.1 years as of September 30, 2024 from 2.2 years as of September 30, 2023.

Previous wording

The current expected credit loss reserve represents approximately 133 basis points of our aggregate loan commitments held at carrying value of approximately $5.1 million as of June 30, 2024, compared with 163 basis points as of June 30, 2023. As of June 30, 2024, we anticipate a softened interest rate environment in our forecast period compared to June 30, 2023, when interest rates were continuing to rise. The prime rate during the three months ended June 30, 2024 was stable at 8.50%, compared to an increase of 25 basis points from 8.00% to 8.25% during the three months ended June 30, 2023. Accordingly, estimates and metrics regarding our borrower's ability to meet debt service obligations, have improved given the expectations of declining interest rates subsequent to June 30, 2024, leading to expected additional free cash flow generation by our portfolio companies. These factors contributed to a decline in the reserve as a percentage of our portfolio principal.

Current wording

The CECL reserve represents approximately 113 basis points of our aggregate loans held for investment, at carrying value, of approximately $354.7 million as of September 30, 2024, compared with 150 basis points as of September 30, 2023. As of September 30, 2024, we anticipate a softened interest rate environment in our forecast period compared to September 30, 2023, when interest rates were continuing to rise. The prime rate during the three months ended September 30, 2024 decreased to 8.00%. Accordingly, estimates and metrics regarding our borrower's ability to meet debt service obligations, have improved given the expectations of declining interest rates subsequent to September 30, 2024, leading to expected additional free cash flow generation by our portfolio companies. These factors contributed to a decline in the reserve as a percentage of our portfolio principal.

Previous wording

We record a reserve liability based on the unfunded portion of loan commitments over the full contractual period over which we are exposed to credit risk through a current obligation to extend credit. Management considered the likelihood that funding will occur, and if funded, the expected credit loss on the funded portion. We continuously evaluate the credit quality of each loan by assessing the risk factors of each loan. There is $6.0 million of unfunded commitments as of June 30, 2024 relating to one borrower, and this unfunded commitment carries a $0 CECL reserve.

Current wording

We record a reserve liability based on the unfunded portion of loan commitments over the full contractual period over which we are exposed to credit risk through a current obligation to extend credit. Management considered the likelihood that funding will occur, and if funded, the expected credit loss on the funded portion. We continuously evaluate the credit quality of each loan by assessing the risk factors of each loan. There is $6.0 million of unfunded commitments as of September 30, 2024 relating to one borrower, and this unfunded commitment carries a $0 CECL reserve. This unfunded commitment was advanced in October 2024.

Previous wording

Net interest income decreased approximately $2.2 million, or 8%, over the comparative period. The decrease was attributable to the decrease in interest income described above, and by a corresponding increase in interest expense driven by the timing of borrowings and an increase in the outstanding balance on the Revolving Loan, which bears interest at the Prime Rate plus an Applicable Margin. The outstanding balance on the Revolving Loan was approximately $76.8 million and $43.0 million, as of June 30, 2024 and 2023, respectively.

Current wording

Interest expense increased by approximately $1.7 million, or 41%, over the comparative period. The increase was attributable to the timing of borrowings and an increase in the outstanding balance on the Revolving Loan, which bears interest at the Prime Rate plus an Applicable Margin. The outstanding balance on the Revolving Loan was approximately $54.0 million and $43.0 million, as of September 30, 2024 and 2023, respectively.

Previous wording

Management and incentive fees to our Manager was approximately $3.5 million for the six months ended June 30, 2024, as compared to approximately $3.9 million for the six months ended June 30, 2023. Management fees were approximately $2.2 million for the six months ended June 30, 2024, as compared to approximately $2.1 million for the six months ended June 30, 2023. The slight increase in management fees was primarily attributable to fewer origination fee offsets in the six months ended June 30, 2024 of approximately $32 thousand, compared to approximately $130 thousand for the six months ended June 30, 2023, as well as an increase in weighted average equity as defined by the Management Agreement for the comparable period. Incentive fees were approximately $1.4 million for the six months ended June 30, 2024, as compared to approximately $2.0 million for the six months ended June 30, 2023, primarily driven by higher trailing twelve month Core Earnings in the first half of 2023.

Current wording

Management and incentive fees to our Manager was approximately $5.2 million for the nine months ended September 30, 2024, as compared to approximately $5.5 million for the nine months ended September 30, 2023, a decrease of $0.3 million or 6%. Management fees were approximately $3.2 million for the nine months ended September 30, 2024, as compared to approximately $3.0 million for the nine months ended September 30, 2023. The slight increase in management fees was primarily attributable to fewer origination fee offsets in the nine months ended September 30, 2024 of approximately $92 thousand, compared to approximately $130 thousand for the nine months ended September 30, 2023, offset by an increase in weighted average equity as defined by the Management Agreement for the comparable period. Incentive fees were approximately $2.0 million for the nine months ended September 30, 2024, as compared to approximately $2.5 million for the nine months ended September 30, 2023, primarily driven by higher trailing twelve month Core Earnings in the nine month period ending September 30, 2023 compared to the same period ending September 30, 2024.

Previous wording

Stock based compensation expense increased by approximately $1.0 million for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The increase over the comparable period is driven by the incremental expense recognized on the 187,335 restricted stock awards granted to employees of our Manager on April 1, 2024.

Current wording

Stock based compensation expense increased by approximately $1.3 million for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023. The increase over the comparable period is primarily driven by the incremental expense recognized on the 187,335 restricted stock awards granted to employees of our Manager on April 1, 2024.

Previous wording

Changes in portfolio risk composition resulting from principal paydowns and new fundings also contributed to the decrease, with reserves on new 2024 originations representing a larger portion of the reserve than loans originated as of June 30, 2023. As of June 30, 2024 approximately 61.2% of our loans carry a risk rating of "1" or "2". During the six month period ended June 30, 2024, we originated loans with a principal balance of approximately $19.3 million which are secured by strong collateral in forms other than real estate. This contributed to the increase in loans that are less than 1.0x secured by real estate collateral as compared to December 31, 2023. However; due to the strength of the other collateral securing these loans, there was not a material increase in the CECL reserve. Additionally, loans risk rated "3" increased to approximately 26.9% of the portfolio at June 30, 2024 from 18.8% of the portfolio at December 31, 2023, as a result of new originations, while loans risk rated "2" decreased to approximately 50.0% from 58.0% during the same period. Despite these fluctuations, loans risk rated "2" and "3" both generally are expected to result in a full repayment of principal and may not carry materially different CECL reserves based on risk ratings alone.

Current wording

Changes in portfolio risk composition resulting from principal paydowns and new fundings contributed to the reversal/decrease, with reserves on new 2024 originations representing a larger portion of the reserve than loans originated as of September 30, 2023. As of September 30, 2024 approximately 72.3% of our loans carry a risk rating of "1" or "2", compared with 66.2% as of September 30, 2023. Additionally, loans risk rated "3" and "4" decreased to approximately 27.7% of the portfolio at September 30, 2024, from 33.8% of the portfolio at September 30, 2023, as a result of improved valuations and borrower specific performance, as well as portfolio composition resulting from advance and repayment activity. Furthermore, during the third quarter, the Company transferred $13.0 million of principal of Loan #2 from loans held for investment to loans held for sale, and reversed approximately $0.2 million of the CECL reserve in connection with the transfer.

Previous wording

The current expected credit loss reserve represents approximately 133 basis points of our aggregate loan commitments held at carrying value of approximately $5.1 million as of June 30, 2024, compared with 163 basis points as of June 30, 2023. As of June 30, 2024, we anticipate a softened interest rate environment in our forecast period compared to June 30, 2023, when interest rates were continuing to rise. The prime rate during the six months ended June 30, 2024 was stable at 8.50%, compared to an increase of 75 basis points from 7.50% to 8.25% during the six months ended June 30, 2023.Accordingly, estimates and metrics regarding our borrower's ability to meet debt service obligations, have improved given the expectations of declining interest rates and additional free cash flow generation by our portfolio companies. These factors contributed to a decline in the reserve as a percentage of our portfolio principal to 133 basis points from 163 basis points as of June 30, 2024 and 2023, respectively.

Current wording

The CECL reserve represents approximately 113 basis points of our aggregate loan principal outstanding, including loans held for sale, of approximately $362.3 million as of September 30, 2024, compared with 150 basis points as of September 30, 2023. As of September 30, 2024, we anticipate a softened interest rate environment in our forecast period compared to September 30, 2023, when interest rates were continuing to rise. The prime rate during the nine months ended September 30, 2024, decreased to 8.00%, compared to an increase of 100 basis points from 7.50% to 8.50% during the nine months ended September 30, 2023.Accordingly, estimates and metrics regarding our borrowers' ability to meet debt service obligations, have improved given the expectations of declining interest rates and additional free cash flow generation by our portfolio companies.

Previous wording

We record a reserve liability based on the unfunded portion of loan commitments over the full contractual period over which we are exposed to credit risk through a current obligation to extend credit. Management considered the likelihood that funding will occur, and if funded, the expected credit loss on the funded portion. We continuously evaluate the credit quality of each loan by assessing the risk factors of each loan. There is $6.0 million of unfunded commitments as of June 30, 2024 relating to one borrower, and this unfunded commitment carries a $0 CECL reserve.

Current wording

We record a reserve liability based on the unfunded portion of loan commitments over the full contractual period over which we are exposed to credit risk through a current obligation to extend credit. Management considered the likelihood that funding will occur, and if funded, the expected credit loss on the funded portion. We continuously evaluate the credit quality of each loan by assessing the risk factors of each loan. There is $6.0 million of unfunded commitments as of September 30, 2024 relating to one borrower, and this unfunded commitment carries a $0 CECL reserve. This unfunded commitment was advanced in October 2024.

Previous wording

As of June 30, 2024 and December 31, 2023, our portfolio included 31 and 27 loans held for investment, of approximately $381.9 million and $353.6 million at carrying value, respectively, prior to the reserve for current expected credit losses. The aggregate originated commitment under these loans was approximately $409.3 million and $378.8 million and outstanding principal was approximately $383.3 million and $355.7 million as of June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024 and December 31, 2023, our loan portfolio had a weighted-average yield-to-maturity internal rate of return (“YTM IRR”) of 18.7% and 19.4%, and was substantially secured by real estate and, with respect to certain of our loans, substantially all assets of the borrowers and certain of their subsidiaries, including equipment, receivables, and licenses. YTM IRR is calculated using various inputs, including (i) cash and paid-in-kind (“PIK”) interest, which is capitalized and added to the outstanding principal balance of the applicable loan, (ii) original issue discount (“OID”), (iii) amortization, (iv) unused fees, and (v) exit fees. Certain of our loans have extension fees, which are not included in our YTM IRR calculations, but may increase YTM IRR if such extension options are exercised by borrowers.

Current wording

As of September 30, 2024 and December 31, 2023, our portfolio of loans held for investment had a weighted-average yield-to-maturity internal rate of return (“YTM IRR”) of 18.2% and 19.4%, and was substantially secured by real estate and, with respect to certain of our loans, substantially all assets of the borrowers and certain of their subsidiaries, including equipment, receivables, and licenses. YTM IRR is calculated using various inputs, including (i) cash and PIK interest, which is capitalized and added to the outstanding principal balance of the applicable loan, (ii) original issue discount (“OID”), (iii) amortization, (iv) unused fees, and (v) exit fees. Certain of our loans have extension fees, which are not included in our YTM IRR calculations, but may increase YTM IRR if such extension options are exercised by borrowers.

Previous wording

As of June 30, 2024 and December 31, 2023, approximately 76.4% and 80.5%, respectively, of our portfolio was comprised of floating rate loans that pay interest at the Prime Rate plus an applicable margin and were subject to a Prime Rate floor. The Prime Rate was 7.50% on January 1, 2023, increased to 7.75% effective February 2, 2023, increased to 8.00% effective March 23, 2023, increased to 8.25% effective May 4, 2023 and increased again to 8.50% as of December 31, 2023. The below summarizes our portfolio as of June 30, 2024:

Current wording

As of September 30, 2024 and December 31, 2023, approximately 62.8% and 80.5%, respectively, of our portfolio, including loans held for sale, was comprised of floating rate loans that pay interest at the Prime Rate plus an applicable margin and were subject to a Prime Rate floor. The Prime Rate was 7.50% on January 1, 2023, increased to 7.75% effective February 2, 2023, increased to 8.00% effective March 23, 2023, increased to 8.25% effective May 4, 2023 and increased again to 8.50% as of December 31, 2023. The Prime Rate declined to 8.00% in September 2024. The below summarizes our portfolio of loans held for investment as of September 30, 2024:

Previous wording

The aggregate principal balance outstanding of Loan #3 is comprised of two tranches. The first tranche has a principal balance $16.6 million, a base interest rate of 13.625% and 2.75% PIK and an original maturity date of July 31, 2024. In July 2024, we entered into an amendment which extended the maturity date of the July 31, 2024 tranche to January 29, 2027. The second tranche has a principal balance of $4.3 million, which has an interest rate of 15.00% and 2.00% PIK, and a maturity date of November 29, 2024. The statistics presented reflect the weighted average of the terms under all advances for the total aggregate loan commitment.

Current wording

The aggregate principal balance outstanding of Loan #3 is comprised of two tranches. The first tranche has a principal balance $16.8 million, a floating interest rate of prime plus 7.75% cash and 2.75% PIK and a maturity date of January 29, 2027. The second tranche has a principal balance of $4.3 million, and bears an interest rate of 15.00% and 2.00% PIK, and a maturity date of November 29, 2024. The statistics presented reflect the weighted average of the rate terms under both tranches for the total aggregate loan commitment.

Previous wording

As of May 1, 2023, Loan #9 was placed on non-accrual status and continues to be on non-accrual as of June 30, 2024. Loan #9 is included on the consolidated balance sheet as a loan held for investment – related party (Note 7).

Current wording

As of May 1, 2023, Loan #9 was placed on non-accrual status and continues to be on non-accrual as of September 30, 2024. Loan #9 is included on the consolidated balance sheet as a loan held for investment – related party (Note 8). This loan had an original maturity date of June 30, 2024 and included in amounts past due in the tables below.

Previous wording

This Loan was paid off on July 15, 2024 and carried a zero CECL reserve as of June 30, 2024.The maturity date presented reflects the original contractual date.

Current wording

This loan was repaid in full in October 2024 and carried a zero CECL reserve as of September 30, 2024. The maturity date presented reflects the date of repayment. During the quarter ended September 30, 2024, $6.0 million of principal of Loan #11 was reclassified as held for sale, at fair value (Note 4).

Previous wording

An affiliate under common control holds a controlling equity investment in this portfolio company.

Current wording

An affiliate under common control holds a controlling equity investment in this portfolio company (Note 8).

Previous wording

This loan has floating grid pricing based on the Prime Rate plus a spread of 5.00% to 8.75% based on monthly annualized EBITDA performance. As of June 30, 2024, applied interest rate is Prime Rate + 5.00%.

Current wording

This loan has floating grid pricing based on the Prime Rate plus a spread of 5.00% to 8.75% based on monthly annualized EBITDA performance. As of September 30, 2024, applied interest rate is Prime Rate + 6.50%.

Previous wording

This loan earns an unused fee on the unfunded commitment at an annual rate of 1.2%.

Current wording

This loan earns an unused fee on the unfunded commitment at an annual rate of 1.2%. The unfunded commitment of $6.0 million was advanced in October 2024 (Note 14).

Previous wording

The following tables present changes in loans held for investment at carrying value as of and for the six months ended June 30, 2024 and 2023:

Current wording

The following tables present changes in loans held for investment at carrying value as of and for the nine months ended September 30, 2024 and 2023:

Previous wording

One loan was reclassified as held for sale from loans held for investment as the decision was made to sell the loan during the six months ended June 30, 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.

Current wording

One loan was reclassified as held for sale from loans held for investment as the decision was made to sell the loan during the nine months ended September 30, 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.

Previous wording

In addition to using certain financial metrics prepared in accordance with GAAP to evaluate our performance, we also use Distributable Earnings and Adjusted Distributable Earnings to evaluate our performance. Each of Distributable Earnings and Adjusted Distributable Earnings is a measure that is not prepared in accordance with GAAP. We define Distributable Earnings as, for a specified period, the net income (loss) computed in accordance with GAAP, excluding (i) non-cash equity compensation expense, (ii) depreciation and amortization, (iii) any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period; provided that Distributable Earnings does not exclude, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash, (iv) provision for current expected credit losses and (v) one-time events pursuant to changes in GAAP and certain non-cash charges, in each case after discussions between our Manager and our independent directors and after approval by a majority of such independent directors. We define Adjusted Distributable Earnings, for a specified period, as Distributable Earnings excluding certain non-recurring organizational expenses (such as one-time expenses related to our formation and start-up).

Current wording

Distributable Earnings is a measure that is not prepared in accordance with GAAP. We define Distributable Earnings as, for a specified period, the net income (loss) computed in accordance with GAAP, excluding (i) non-cash equity compensation expense, (ii) depreciation and amortization, (iii) any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period; provided that Distributable Earnings does not exclude, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash, (iv) provision for current expected credit losses and (v) one-time events pursuant to changes in GAAP and certain non-cash charges, in each case after discussions between our Manager and our independent directors and after approval by a majority of such independent directors. We define Adjusted Distributable Earnings, for a specified period, as Distributable Earnings excluding certain non-recurring organizational expenses (such as one-time expenses related to our formation and start-up).

Previous wording

The book value per share of our common stock as of June 30, 2024 and December 31, 2023 was approximately $14.92 and $14.94, respectively.

Current wording

The book value per share of our common stock as of September 30, 2024 and December 31, 2023 was approximately $15.05 and $14.94, respectively.

Previous wording

Our primary sources of cash generally consist of unused borrowing capacity under our financing sources, the net proceeds of future offerings of equity or debt securities, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating results. On a long-term basis, we expect that our primary sources of financing will be, to the extent available to us, through (a) credit facilities and (b) public and private offerings of our equity and debt securities. We may utilize other sources of financing to the extent available to us. As the cannabis industry continues to evolve and to the extent that additional states legalize cannabis, the demand for capital continues to increase as operators seek to enter and build out new markets. In the short-term, we expect the principal amount of the loans we originate to increase and that we will need to raise additional equity and/or debt financing to increase our liquidity. We expect to achieve this through recycling capital from loan paydowns, repayments, and sales of common stock related to our shelf registration statement.

Current wording

Our primary sources of cash generally consist of unused borrowing capacity under our financing sources, the net proceeds of future offerings of equity or debt securities, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating results. On a long-term basis, we expect that our primary sources of financing will be, to the extent available to us, through (a) credit facilities and (b) public and private offerings of our equity and debt securities. We may utilize other sources of financing to the extent available to us. As the cannabis industry continues to evolve and to the extent that additional states legalize cannabis, we expect the demand for capital will continue to increase as operators seek to enter and build out new markets. In the short-term, we expect the principal amount of the loans we originate will increase and that we will need to raise additional equity and/or debt financing to increase our liquidity. We expect to achieve this through recycling capital from loan paydowns, repayments, and sales of common stock related to our shelf registration statement.

Previous wording

As of June 30, 2024 and December 31, 2023, all of our cash was unrestricted and totaled approximately $7.1 million and $7.9 million, respectively. We believe that our cash on hand, capacity available under our Revolving Loan, and cash flows from operations for the next twelve months will be sufficient to satisfy the operating requirements of our business through at least the next twelve months. The sources of financing for our target investments are described below.

Current wording

As of September 30, 2024 and December 31, 2023, all of our cash was unrestricted and totaled approximately $6.8 million and $7.9 million, respectively. We believe that our cash on hand, capacity available under our Revolving Loan, the Unsecured Notes and cash flows from operations for the next twelve months will be sufficient to satisfy the operating requirements of our business through at least the next twelve months. The sources of financing for our target investments are described below.

Previous wording

As of June 30, 2024 and December 31, 2023, unamortized debt issuance costs related to the Revolving Loan, including all amendments and amendments and restatements thereto, as applicable, of $301,037 and $366,592, respectively, are recorded in other receivables and assets, net on the consolidated balance sheets.

Current wording

As of September 30, 2024 and December 31, 2023, unamortized debt issuance costs related to the Revolving Loan, including all amendments and amendments and restatements thereto, as applicable, of $261,217 and $366,592, respectively, are recorded in other receivables and assets, net on the consolidated balance sheets.

Previous wording

For the six months ended June 30, 2024, the Company had net borrowings of $10.8 million against the Revolving Loan. As of June 30, 2024, the Company had $28.3 million available and $76.8 million outstanding under the Revolving Loan (Note 6).

Current wording

For the nine months ended September 30, 2024, the Company had net paydowns of $(12.0) million against the Revolving Loan. As of September 30, 2024, the Company had $56.0 million available and $54.0 million outstanding under the Revolving Loan (Note 6).

Previous wording

For the six months ended June 30, 2024, the Company sold an aggregate of 1,306,803 shares of the Company’s common stock under the Sales Agreement at a weighted average price of $15.88 per share, generating net proceeds of approximately $20.2 million.

Current wording

For the nine months ended September 30, 2024, the Company sold an aggregate of 1,309,503 shares of the Company’s common stock under the Sales Agreement at a weighted average price of $15.88 per share, generating net proceeds of approximately $20.4 million.

Previous wording

The following table sets forth changes in cash and cash equivalents for the six months ended June 30, 2024 and 2023, respectively:

Current wording

The following table sets forth changes in cash and cash equivalents for the nine months ended September 30, 2024 and 2023, respectively: