Chicago Atlantic BDC, Inc. Q4 FY2024 earnings call

• Declared two dividends of $0.34 per share, a 36% increase from the $0.25 per share dividend for the quarter ended September 30, 2024.
• Closed on a $100 million senior secured credit facility with an attractive rate of 300 basis points over SOFR.
• Deployed a total of $45.5 million in gross fundings by principal value from October 1, 2024 to March 31, 2025.
• Investment portfolio had 28 portfolio companies, with 23.2% invested outside of cannabis, 79.5% floating rate, and no non-accrual loans.
• BDC had no debt at year-end but obtained a new credit facility to deploy more capital going forward.

Gross investment income for the fourth quarter was $12.7 million, compared to $3.7 million in the fourth quarter of 2024. Excluding transaction-related costs, investment income was $8.3 million or $0.56 per share, versus $1.7 million or $0.28 per share a year ago. Reported net investment income was $8 million or $0.35 per share for the quarter. Net assets were $301.2 million at quarter end with NAV per share at $13.20. As of yearend, there were 22.8 million common shares issued and outstanding. The investment portfolio had 28 portfolio companies, with 23.2% of the portfolio invested outside of cannabis across multiple sectors. Average deposition size was about 3.3% of the debt portfolio, 79.5% of the portfolio was floating rate and 99% of loans had a rate floor. Gross weighted average yield of company debt investments was approximately 16.5%. Weighted average secured net leverage for portfolio companies was 1.5 times and no loans were on non-accrual status. At the BDC level, there was no debt as of year-end, but a $100 million senior secured credit facility was closed subsequent to year end to provide additional capital for deployment.

• Will take leverage up slightly as the year progresses but will remain well below BDC averages.
• Focused on deploying the $100 million credit facility, but deployments can be lumpy and difficult to forecast quarter-by-quarter throughout the end of the year.
• Anticipates the opportunity set to grow the portfolio will remain robust and has a flexible credit facility with a great banking partner providing dry powder for execution.

• Lack of meaningful federal cannabis reforms has created challenges within the industry of focus, but the company continues to underwrite assuming the federal regulatory environment remains unchanged.

Q: Good morning, everyone. Peter, maybe it’s a two-part question, but maybe if we can remind the audience of the advantages of the BDC, both from the Chicago Atlantic point of view, but also from the borrower point of view. What’s advantage for the borrower of borrowing money from a BDC, compared to a mortgage REIT or a sell leaseback, if you can adjust that in general terms. But the second part to the question is, in terms of more of the restrictions around what is the assets you can invest in, just a percentage that has to be I understand private or smaller. Just talk about that where you are. I mean, there seem to be quite a bit of public companies or larger companies in the portfolio. Maybe I’m wrong about that. But just remind us about the restrictions in terms of what you can invest in and what you cannot.

A: From a borrower perspective, the borrower doesn’t want to know about your restrictions. The borrower doesn’t want to hear about what a lender’s limitations are. A borrower wants availability of capital and a strategic partner that can - that understands their business and can support their growth, both through good times and challenging times. And so, the BDC is another lever through which Chicago Atlantic can support operators across the industry and provide another toolkit, another source of funding to allow us to provide more flexible capital solutions to our operators. BDCs are registered by the 1940 Investment Act. BDCs have limitations on concentration and they have limitations on the number of companies that may be invested and that are public with a market cap above $250 million. They were established in order to support lending to small and medium sized private companies across the US and that’s the purpose to which we deploy this capital today in with particular focus on the US cannabis industry and other underserved lending markets.

Q: In terms of the pipeline, you’ve talked about, I don’t know how much guidance you can give, but $32 million in new debt, new fundings, in new debt in the first quarter. Is that a pace that we can assume can be sustained throughout the year? 30 million each quarter? And just related to that, the appetite for leverage, I think Martin referred to taking on debt, but leverage less than the average we see. What does that mean, 20%, 50%?

A: We’re focused on deploying the credit facility that we announced in the first quarter. As far as pacing goes, it’s difficult to forecast, because deployments can be lumpy and can accelerate quickly. So it’s difficult for us to forecast quarter-by-quarter throughout the end of the year, but we’re focused on deploying the existing credit facility today. Dino Colonna: And Pablo, just to clarify, that was roughly $30 million of commitments and roughly $20 million of fundings post the end of the year.

Q: Obviously, you highlighted the quality of the book. We’ve seen issues at other companies, right? Dividend cuts, some issues with IPR with their tenants. From one angle, we would say, well, it’s a challenging industry, so that’s something that should be expected. But it sounds like you are in a much better situation in terms of your book. I don’t know what more color you can give, because from outside, one could say it’s not so much about execution on the lender side, it’s more about just the landscape out there, but maybe that’s a wrong read.

A: I think that at Chicago Atlantic, we’ve created something special. We’ve been operating in this space for close to six years. We’ve deployed more than $2 billion of capital across close to 200 investments and we’ve done so through various cycles of cannabis equity capital markets through challenging state level dynamics. And we’ve done so with a pretty impressive track record. We do think of it as execution, but it’s execution on our side. Our task is to underwrite risks that features characteristics that is our area of focus, which is low leverage to focus on diversified cash flows, strong collateral base with some of the best operators in the industry. And that discipline has allowed us to maintain our track record of operator success and portfolio construction over the last six years and that’s what we’re looking to continue to perform to in the BDC.

Q: Just talk about your interest rate exposure, floors, flexible fixed rate versus flexible rates, if you can touch on that?

A: I think that we’ve mentioned that the vast majority of our loans are fixed rates or have floors usually between SOFR and prime. Approximately, 99% of our loans have a floor. So it certainly helps to decrease the downside risk of any interest rates. I’m not sure if there’s any more color you want to add to that you want me to add to that, Pablo?