CHICAGO ATLANTIC REAL ESTATE FINANCE, INC. FORWARD-LOOKING STATEMENTS
Some of the statements contained in this quarterly report constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and we intend such statements to be covered by the safe harbor provisions contained therein. Forward-looking statements relate to future events or the future performance or financial condition ofChicago Atlantic Real Estate Finance, Inc. (the "Company," "we," "us," and "our"). The information contained in this section should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. This description contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the results discussed in the forward-looking statements due to the factors set forth in this quarterly report and in "Risk Factors" in our annual report on Form 10-K filed with theSecurities and Exchange Commission (the "SEC") and in Part II, Item 1A of this quarterly report on Form 10-Q, as such risks may by updated, amended, or superseded from time to time by subsequent reports we file with theSEC . The forward-looking statements contained in this report involve a number of risks and uncertainties, including statements concerning: ? our future operating results and projected operating results; ? the impact of COVID-19 on our business and the global economy, including disruptions to the supply chain; ? the ability of our Manager to locate suitable loan opportunities for us, monitor and actively manage our loan portfolio, and
implement our
investment strategy;
? the allocation of loan opportunities to us by our Manager;
? the impact of inflation on our operating results;
? actions and initiatives of the federal or state governments and changes
to government policies related to cannabis and the execution and impact
of these actions, initiatives, and policies, including the fact that
cannabis remains illegal under federal law;
? the estimated growth in and evolving market dynamics of the cannabis market;
? the demand for cannabis cultivation and processing facilities; ? shifts in public opinion regarding cannabis;
? the state of the
? economic trends and economic recoveries; ? the amount and timing of our cash flows, if any, from our loans; ? our ability to obtain and maintain financing arrangements; ? our expected leverage; ? changes in the value of our loans; ? our expected investment and underwriting process; ? rates of default or decreased recovery rates on our loans;
? the degree to which any interest rate or other hedging strategies may
or may not protect us from interest rate volatility;
? changes in interest rates and impacts of such changes on our results of
operations, cash flows, and the market value of our loans;
? interest rate mismatches between our loans and our borrowings used to
fund such loans;
? the departure of any of the executive officers or key personnel
supporting and assisting us from our Manager or its affiliates;
? impact of and changes in governmental regulations, tax law and rates,
accounting guidance, and similar matters;
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? our ability to maintain our exclusion or exemption from registration
under the Investment Company Act;
? our ability to qualify and maintain our qualification as a real estate
investment trust ("REIT") for U.S. federal income tax purposes;
? estimates relating to our ability to make distributions to our
stockholders in the future;
? our understanding of our competition;
? market trends in our industry, interest rates, real estate values, the
securities markets or the general economy; and
? any of the other risks, uncertainties and other factors we identify in
our annual report on Form 10-K or this quarterly report on Form 10-Q.
Available Information
We routinely post important information for investors on our website,
www.chicagoatlantic.com. We intend to use this webpage as a means of disclosing
material information, for complying with our disclosure obligations under
Regulation FD and to post and update investor presentations and similar
materials on a regular basis. We encourage investors, analysts, the media, and
others interested in us to monitor the Investments section of our website, in
addition to following our press releases, SEC filings, public conference calls,
presentations, webcasts and other information we post from time to time on our
website. To sign-up for email-notifications, please visit "Contact" section of
our website under "Join Our Mailing List" and enter the required information to
enable notifications.
Overview
We are a commercial real estate finance company. Our primary investment
objective is to provide attractive, risk-adjusted returns for stockholders over
time primarily through consistent current income dividends and other
distributions and secondarily through capital appreciation. We intend to achieve
this objective by originating, structuring and investing in first mortgage loans
and alternative structured financings secured by commercial real estate
properties. Our current portfolio is comprised primarily of senior loans to
state-licensed operators in the cannabis industry, secured by real estate,
equipment, receivables, licenses or other assets of the borrowers to the extent
permitted by applicable laws and regulations governing such borrowers. We intend
to grow the size of our portfolio by continuing the track record of our business
and the business conducted by our Manager and its affiliates by making loans to
leading operators and property owners in the cannabis industry. There is no
assurance that we will achieve our investment objective.
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 $30 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 a one to two year maturities are generally
interest only loans.
As of September 30, 2022 , our portfolio is comprised primarily of first
mortgages to established multi-state or single-state cannabis operators or
property owners. We consider cannabis operators to be established if they are
state-licensed and are deemed to be operational and in good standing by the
applicable state regulator. We do not own any stock, warrants to purchase stock
or other forms of equity in any of our portfolio companies that are involved in
the cannabis industry, and we will not take stock, warrants or equity in such
issuers until permitted by applicable laws and regulations, including U.S.
federal laws and regulations.
We are an externally managed Maryland corporation that elected to be taxed as a
REIT under Section 856 of the Code, commencing with our taxable year ended
December 31, 2021 . We believe that our method of operation will enable us to
continue to qualify as a REIT. However, no assurances can be given that our
beliefs or expectations will be fulfilled, since qualification as a REIT depends
on us continuing to satisfy numerous asset, income, and distribution tests,
which in turn depend, in part, on our operating results. We also intend to
operate our business in a manner that will permit us and our subsidiaries to
maintain one or more exclusions or exemptions from registration under the
Investment Company Act.
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Revenues
We operate as one operating segment and are primarily focused on financing senior secured loans and other types of loans for established state-licensed operators in the cannabis industry. These loans are generally held for investment and are substantially secured by real estate, equipment, licenses and other assets of the borrowers to the extent permitted by the applicable laws and the regulations governing such borrowers. We generate revenue primarily in the form of interest income on loans. As ofSeptember 30, 2022 andDecember 31, 2021 , approximately 59.7% and 53.2%, respectively, of our portfolio was comprised of floating rate loans, and 40.3% and 46.8% 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. The prime rate was 3.25% for the period fromJanuary 1, 2022 throughMarch 16, 2022 , and increased to 3.50% effectiveMarch 17, 2022 . It was increased to 4.00% effectiveMay 5, 2022 , increased to 4.75% effectiveJune 16, 2022 , increased to 5.50% effectiveJuly 28, 2022 , and increased again to 6.25% effectiveSeptember 22, 2022 . The principal amount of our loans and any accrued but unpaid interest thereon generally become due at the applicable maturity date. In some cases, our interest income includes a paid-in-kind ("PIK") component for a portion of the total interest. The PIK interest, computed at the contractual rate specified in each applicable loan agreement, is accrued in accordance with the terms of such loan agreement and capitalized to the principal balance of the loan and recorded as interest income. The PIK interest added to the principal balance is typically amortized and paid in accordance with the applicable loan agreement. In cases where the loans do not amortize, the PIK interest is collected and recognized upon repayment of the outstanding principal. We also generate revenue from original issue discounts ("OID"), which is also recognized as interest income through amortization over the initial term of the applicable loans. Delayed draw loans may earn interest or unused fees on the undrawn portion of the loan, which is recognized as interest income in the period earned. Other fees, including prepayment fees and exit fees, are also recognized as interest income when received. Any such fees will be generated in connection with our loans and recognized as earned in accordance with generally accepted accounting principles ("GAAP"). Expenses
Our primary operating expenses are the payment of Base Management Fees and
Incentive Compensation under our Management Agreement with our Manager and the
allocable portion of overhead and other expenses paid or incurred on our behalf,
including reimbursing our Manager for a certain portion of the compensation of
certain personnel of our Manager who assist in the management of our affairs,
excepting only those expenses that are specifically the responsibility of our
Manager pursuant to our Management Agreement. We bear all other costs and
expenses of our operations and transactions, including (without limitation) fees
and expenses relating to:
? organizational and offering expenses;
? quarterly valuation expenses;
? fees payable to third parties relating to, or associated with, making
loans and valuing loans (including third-party valuation firms);
? fees and expenses associated with investor relations and marketing
efforts (including attendance at investment conferences and similar
events);
? federal and state registration fees;
? any exchange listing fees;
? federal, state and local taxes;
? independent directors' fees and expenses;
? brokerage commissions;
? costs of proxy statements, stockholders' reports and notices; and
? costs of preparing government filings, including periodic and current
reports with the SEC .
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Income Taxes
We are a Maryland corporation that elected to be taxed as a REIT under the Code,
commencing with our taxable year ended December 31, 2021 . We believe that our
method of operation will enable us to continue to qualify as a REIT. However, no
assurances can be given that our beliefs or expectations will be fulfilled,
since qualification as a REIT depends on us satisfying numerous asset, income
and distribution tests which depend, in part, on our operating results.
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 and our net capital gain. 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 Required Distributions 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. 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. 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 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 is included in the line item, income tax expense.
Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("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. We have
analyzed our various federal and state filing positions and believe that our
income tax filing positions and deductions are well documented and supported as
of September 30, 2022 . Based on our evaluation, there is no reserve for any
uncertain income tax positions. Accrued interest and penalties, if any, are
included within other liabilities in the consolidated balance sheets.
Factors Impacting our Operating Results
The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, commercial real estate debt and other financial assets in the marketplace. Our net interest income, which includes the accretion and amortization of OID, is recognized based on the contractual rate and the outstanding principal balance of the loans we originate. Interest rates will vary according to the type of loan, conditions in the financial markets, creditworthiness of our borrowers, competition, and other factors, some of which cannot be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers.
Developments During the Third Quarter of 2022
Updates to Our Loan Portfolio during the Third Quarter of 2022
OnJuly 1, 2022 , we closed one credit facility with a new borrower, which has an aggregate commitment of$9.0 million ,$5.0 million of which was advanced at closing. OnJuly 8, 2022 , we sold a senior secured loan to an affiliate under common control. The selling price of approximately$6.7 million was approved by the audit committee of the Board. The fair value approximated the carrying value of the loan plus accrued and unpaid interest throughJuly 8, 2022 . OnAugust 4, 2022 , we assigned$10.0 million of unfunded commitment of a senior secured loan to an affiliate. OnSeptember 2, 2022 , we advanced approximately$680 thousand in aggregate principal on an existing credit facility to one borrower. 21
Subsequent Updates to Our Loan Portfolio
OnOctober 27, 2022 , one borrower with$30.0 million of outstanding principal in multiple tranches maturing in April and May of 2023 refinanced and consolidated the multiple tranches of debt into one loan maturing inOctober 2026 .
Dividends Declared Per Share
For the period fromJuly 1, 2022 throughSeptember 30, 2022 , we declared an ordinary cash dividend of$0.47 per share of our common stock, relating to the third quarter of 2022, which was paid onOctober 14, 2022 to stockholders of record as of the close of business onSeptember 30, 2022 . The total amount of the cash dividend payment was approximately$8.3 million .
The payment of these dividends is not indicative of our ability to pay such dividends in the future.
Results of Operations
For the three months ended
For the For the
three months three months
ended ended
September 30, June 30,
2022 2022
Revenue
Interest income $ 13,795,097 $ 11,850,028
Interest expense (861,348 ) (449,556 )
Net interest income 12,933,749 11,400,472
Expenses
Management and incentive fees, net 1,347,421 1,247,561
General and administrative expense 1,076,798
777,212
Provision for current expected credit losses 306,885 1,045,665 Professional fees 348,785 743,670 Stock based compensation 84,891 122,525 Total expenses 3,164,780 3,936,633 Net Income before income taxes 9,768,969 7,463,839 Income tax expense - - Net Income$ 9,768,969 $ 7,463,839
? Interest income increased by approximately
the quarter ended September 30, 2022 compared to the quarter ended June
30, 2022. The increase was driven primarily by an increase in the prime
rate from 4.75% as of June 30, 2022 , to 6.25% as of September 30, 2022,
impacting approximately 60% of the Company's loans which bear a
floating rate as well as new fundings of approximately $5.7 million in
loan principal.
? Net interest income increased approximately $1.5 million or 13% during
the comparative period. The increase was primarily attributable to the
increase in interest income described above, and was offset by a
corresponding increase in interest expense. During the thirdquarter of
2022, we borrowed an additional $8.0 million on the revolving credit
facility, which also bears interest at the prime rate plus an
applicable margin and was subject to the prime rate increases during
the quarter.
? We incurred base management and incentive fees payable to our Manager
of approximately $1.3 million for the three months ended
2022, as compared to approximately $1.2 million for the three months
ended June 30, 2022 . The increase was primarily attributable to fewer
origination fee offsets in the three months ended September 30 , 2022 of
approximately $193,000 , compared to approximately $365,000 for the
three months ended June 30, 2022 , as well as an increase in weighted
average equity as defined by the Management Agreement for the
comparable period.
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? General and administrative expenses and professional fees decreased by
approximately $95,000 , or 6%, for the three months ended
2022 as compared to the three months ended June 30, 2022 . The decrease
was primarily due to a decrease in audit, legal, investor relations and
third-party consulting fees, offset in part by an increase in overhead
reimbursements for costs incurred by the Manager on behalf of the
Company.
? Provision for current expected credit losses decreased in the three
months ended September 30, 2022 as compared to the three months ended
June 30, 2022 primarily due to the decrease in originationactivities
and fewer advances to our existing borrowers. The declines in risk
ratings shown in the following table from December 31, 2021 to
September 30, 2022 , are not due to any borrower specific credit issues
relating to the borrowers, but rather, are primarily due to our
quarterly re-evaluation of overall current macroeconomicconditions
affecting our borrowers. The current expected credit loss reserve
represents 44 basis points of our aggregate loan commitments held at
carrying value of approximately $348.9 million and wasbifurcated
between (i) the current expected credit loss reserve(contra-asset)
related to outstanding balances on loans held at carrying value of
approximately $1.5 million and (ii) a liability for unfunded
commitments of $53,908 . The liability is 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. Wecontinuously
evaluate the credit quality of each loan by assessing the risk factors
of each loan.
For the nine months ended
Period
from
March 30,
For the 2021
nine months (inception)
ended to
September 30, September 30,
2022 2021
Revenue
Interest income $ 35,478,178 $ 5,295,812
Interest expense (1,383,172 ) (41,918 )
Net interest income 34,095,006 5,253,894
ExpensesManagement and incentive fees, net 3,266,487
-
General and administrative expense 2,410,151
13,531
Organizational expense -
104,291
Provision for current expected credit losses 1,403,892
-
Professional fees 1,649,360 -
Stock based compensation 328,356 -
Total expenses $ 9,058,246 $ 117,822
Net Income before income taxes 25,036,760 5,136,072
Income tax expense - -
Net Income $ 25,036,760 $ 5,136,072
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We commenced operations on March 30, 2021 and, therefore, the comparative period
for the three and nine months ended September 30, 2022 is from March 30, 2021
(inception) to September 30, 2021 (the "Prior Period" or "period ended September
30, 2021 ").
? Interest income increased as we deployed a significant amount of capital
subsequent to
higher interest rates on our floating rate loans held for investment,
reflecting an increasing trend in interest income.
? We drew $53 million on the revolving credit facility during the nine
months ended September 30, 2022 contributing to an increase in interest
expense that previously included only amortization of deferred
financing costs for the comparative prior year period.
? We incurred base management fees payable to our Manager for the nine
months ended September 30, 2022 of approximately $3.3 million and $0
for the period ended September 30, 2021 . Pursuant to a Fee Waiver
Letter Agreements executed by our Manager, dated September 30, 2021 ,
all base management fees that would have been payable to our Manager
for the period from May 1, 2021 to September 30, 2021 werevoluntarily
waived and are not subject to recoupment at a later date. Our Manager
has incurred general administrative expenses on our behalf and was
reimbursed approximately $2.1 million for the nine months ended
September 30, 2022 . For the period ended September 30, 2021 , all
reimbursements to our Manager for general and administrative expenses
were waived.
? Provision for current expected credit losses increased in the nine
months ended September 30, 2022 as compared to the period ended
September 30, 2021 . The declines in risk ratings shown in the following
table from December 31, 2021 to September 30, 2022 , are not due to any
borrower specific credit issues relating to the borrowers, but rather,
are primarily due to our re-evaluation of overall currentmacroeconomic
conditions affecting our borrowers. The current expected credit loss
reserve represents 44 basis points of our aggregate loan commitments
held at held at carrying value of approximately $348.9 million and was
bifurcated between (i) the current expected credit loss reserve
(contra-asset) related to outstanding balances on loans held at
carrying value of approximately $1.5 million and (ii) aliability for
unfunded commitments of $53,908 .
? Professional fees increased in the nine months ended
compared to the period ended
audit and consulting fees.
? Stock based compensation was issued in December 2021 following the
completion of our initial public offering resulting in $328,356 in
stock compensation expense for the nine months ended September 30,
2022 .
Loan Portfolio
As of September 30, 2022 and December 31, 2021 , our portfolio included 22 and 21
loans held for investment of approximately $331.1 million and $197.0 million of
loans receivable, respectively. The aggregate originated commitment under these
loans was approximately $348.9 million and $235.1 million and outstanding
principal was approximately $334.5 million and $200.6 million as of September
30, 2022 and December 31, 2021 , respectively. As of September 30, 2022 and
December 31, 2021 , our loan portfolio had a weighted-average yield-to-maturity
internal rate of return ("YTM IRR") of 18.3% and 18.6%, respectively, 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 payment-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.
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As of September 30, 2022 and December 31, 2021 , approximately 59.7% and 53.2%,
respectively, of its 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 3.25% for the period from January 1, 2022 through
March 16, 2022 , increased to 3.5% effective March 17, 2022 , increased to 4.0%
effective May 5, 2022 , increased again to 4.75% effective June 16, 2022 ,
increased to 5.50% effective July 28, 2022 , and increased again to 6.25%
effective September 22, 2022 . The below summarizes our portfolio as of September
30, 2022 :
Funding Maturity Total Principal Carrying Our Loan Future Interest Periodic YTMLoan Date (1) Date (2) Commitment (3) Balance Value Portfolio Fundings Rate (4) Payment(5) IRR (6) 1(8) 7/2/2020 5/30/2023 30,000,000 30,000,000
29,712,254 9.0 % - 10.07% I/O 12.8 %
2 3/5/2021 12/31/2024 P + 6.65%(7)(13)
35,891,667 36,646,551 36,464,426 11.0 % - Cash, 3.25% PIK P&I 16.9 %
3 3/25/2021 11/29/2024 13.91 Cash,
20,105,628 20,673,831 20,229,374 6.1 % - 2.59% PIK(12) P&I 20.8 %
4(9) 4/19/2021 12/31/2023 12,900,000 11,909,539 11,909,539 3.6 % 939,952 19.01% P&I 23.4 %
5 4/19/2021 4/30/2023 3,500,000 1,500,000 1,500,000 0.5 % 2,000,000 P + 12.25%(7) P&I 24.3 %
6 5/28/2021 5/31/2025 P + 10.75%(7)
12,900,000 13,263,665 13,263,665 4.0 % - Cash, 4% PIK(10) P&I 22.3 %
7 8/20/2021 2/20/2024 6,000,000 4,443,750 4,438,192 1.3 % 1,500,000 P + 9.00%(7) P&I 16.5 %
8 8/24/2021 6/30/2025 13% Cash,
25,000,000 23,168,151 22,925,222 6.9 % 2,142,857 2.5% PIK P&I 17.4 %
9 9/1/2021 9/1/2024 P + 9.25%(7)
9,500,000 9,554,960 9,433,374 2.8 % - Cash, 2% PIK P&I 19.9 %
10 9/3/2021 6/30/2024 P + 10.75%(7)
15,000,000 15,536,102 15,536,102 4.7 % - Cash, 3% PIK P&I 22.8 %
11 9/20/2021 9/30/2024 470,411 313,607 313,607 0.1 % - 11.00% P&I 21.4 %
12 9/30/2021 9/30/2024 P + 8.75%(7)
32,000,000 32,479,495 31,764,528 9.6 % - Cash, 2% PIK I/O 19.4 %
13 11/8/2021 10/31/2024 20,000,000 20,000,000 19,789,890 6.0 % - 13.00% P&I 15.9 %
14 11/22/2021 11/22/2022 10,600,000 10,600,000 10,577,513 3.2 % - P + 7.00%(7) I/O 17.9 %
15 12/27/2021 12/27/2026 15% Cash,
5,000,000 5,000,000 5,000,000 1.5 % - 2.5% PIK P&I 18.5 %
16 12/29/2021 12/29/2023 10.50% Cash,
6,000,000 3,739,861 3,683,765 1.1 % 2,400,000 1% to 5% PIK(11) I/O 20.6 %
17 12/30/2021 12/31/2024 13,000,000 7,500,000 7,443,733 2.2 % 5,500,000 P + 9.25%(7) I/O 20.6 %
18 1/18/2022 1/31/2025 15,000,000 15,000,000 14,706,011 4.4 % - 11.00% P&I 13.1 %
19 2/3/2022 2/28/2025 P + 8.25%(7)
30,000,000 30,602,729 30,130,650 9.1 % - Cash, 3% PIK P&I 23.4 %
20 3/11/2022 8/29/2025 11% Cash,
20,000,000 20,327,703 20,243,185 6.1 % - 3% PIK P&I 15.4 %
21 5/9/2022 5/30/2025 11% Cash,
17,000,000 17,204,978 17,056,894 5.2 % - 3% PIK P&I 15.5 %
22 7/1/2022 6/30/2026
P + 8.50%(7)
9,000,000 5,038,013 4,953,623 1.5 % 4,000,000 Cash, 3% PIK P&I 25.1 %
Subtotal 348,867,706 334,502,935 331,075,547 100.0 % 18,482,809 15.8% Wtd Average 18.3 %
(1) All loans originated prior to
entities at fair value plus accrued interest on or subsequent to
2021.
(2) Certain loans have extension options from original maturity date.
25
(3) Total Commitment excludes future amounts to be advanced at sole discretion
of the lender.
(4) "P" = prime rate and depicts floating rate loans that pay interest at theprime rate plus a specific percentage; "PIK" = paid in kind interest. (5) P&I = principal and interest. I/O = interest only. P&I loans may include
interest only periods for a portion of the loan term. (6) Estimated YTM includes a variety of fees and features that affect the total
yield, which may include, but is not limited to, OID, exit fees, prepayment
fees, unused fees and contingent features. OID is recognized as a discount
to the funded loan principal and is accreted to income over the term of the
loan.
The estimated YTM calculations require management to make estimates and
assumptions, including, but not limited to, the timing and amounts of loan
draws on delayed draw loans, the timing and collectability of exit fees, the
probability and timing of prepayments and the probability of contingent
features occurring. For example, certain credit agreements contain
provisions pursuant to which certain PIK interest rates and fees earned by
us under such credit agreements will decrease upon the satisfaction of
certain specified criteria which we believe may improve the risk profile of
the applicable borrower. To be conservative, we have not assumed any
prepayment penalties or early payoffs in our estimated YTM calculation.
Estimated YTM is based on current management estimates and assumptions,
which may change. Actual results could differ from those estimates and
assumptions.
(7) This Loan is subject to prime rate floor.
(8) The aggregate loan commitment to Loan #1 includes a
advance which has an interest rate of 15.25%, a second advance of
million, which has an interest rate of 9.75%, and a third advance of
million, which has an interest rate of 8.5%. The statistics presented
reflect the weighted average of the terms under all three advances for the
total aggregate loan commitment.
(9) The aggregate loan commitment to Loan #4 includes a
which has a base interest rate of 15.00%, and a second advance of
million, which has an interest rate of 39.00%. The statistics presented
reflect the weighted average of the terms under both advances for the total
aggregate loan commitment.
(10) Subject to adjustment not below 2% if borrower receives at least two
consecutive quarters of positive cash flow after the closing date. (11) PIK is variable with an initial rate of five percent (5.00%) per annum,
until borrower's delivery of audited financial statements for the fiscal
year ended
adjusted to a rate of 1% to 5% contingent on the financial results of the
borrower.
(12) The aggregate loan commitment to Loan #3 includes a
advance, which has a base interest rate of 13.625%, 2.75% PIK and a second
advance of
The statistics presented reflect the weighted average of the terms under
both advances for the total aggregate loan commitment. (13) This Loan is subject to an interest rate cap.
The following tables summarize our loans held for investment as ofSeptember 30, 2022 andDecember 31, 2021 : As of September 30, 2022 Weighted Average Original Remaining Outstanding Issue Carrying Life Principal (1) Discount Value (1) (Years) (2) Senior Term Loans$ 334,502,935 $ (3,427,388 ) $ 331,075,547 2.1
Current expected credit loss reserve - -
(1,497,933 )
Total loans held at carrying value, net
(1) The difference between the Carrying Value and the Outstanding Principal
amount of the loans consists of unaccreted original issue discount and loan
origination costs.
(2) Weighted average remaining life is calculated based on the carrying value of
the loans as of September 30, 2022 .
As of December 31, 2021
Weighted
Average
Original Remaining
Outstanding Issue Carrying Life
Principal (1) Discount Value (1) (Years) (2)
Senior Term Loans $ 200,632,056 $ (3,647,490 ) $ 196,984,566 2.2Current expected credit loss reserve - -
(134,542 )
Total loans held at carrying value, net
(1) The difference between the Carrying Value and the Outstanding Principal
amount of the loans consists of unaccreted original issue discount and loan
origination costs
(2) Weighted average remaining life is calculated based on the carrying value of
the loans as of December 31, 2021
26
The following table presents changes in loans held for investment at carrying
value as of and for the nine months ended
Current
Original Expected
Issue Credit Loss Carrying
Principal (1) Discount Reserve Value (1)Balance at December 31, 2021$ 200,632,056 $ (3,647,490 ) $ (134,542 ) $ 196,850,024 Loans contributed - - - - New fundings 143,624,312 (2,180,593 ) - 141,443,719 Principal repayment of loans (6,892,654 ) - - (6,892,654 ) Accretion of original issue discount - 2,139,972
- 2,139,972
Sale of loans (6,957,500 ) 260,723 - (6,696,777 )
PIK Interest 4,096,721 - - 4,096,721Current expected credit loss reserve - - (1,363,391 ) (1,363,391 ) Balance at September 30, 2022$ 334,502,935 $ (3,427,388
)$ (1,497,933 ) $ 329,577,614
(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 loan origination costs. Outstanding principal balance includes
capitalized PIK interest, if applicable.
Current
Original Expected
Issue Credit Loss Carrying
Principal (1) Discount Reserve Value (1)Balance at March 30, 2021 (inception) $ - $ -
$ - $ - Loans contributed 32,589,907 (613,391 ) - 31,976,516 New fundings 105,952,844 (1,778,500 ) - 104,174,344
Principal repayment of loans (9,582,613 ) - - (9,582,613 ) Accretion of original issue discount - 276,838
- 276,838
Sale of loans - - - -
PIK Interest 278,079 - - 278,079Balance at September 30, 2021$ 129,238,217 $ (2,115,053
) $ -$ 127,123,164
(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 loan origination costs. Outstanding principal balance includes
capitalized PIK interest, if applicable.
We may make modifications to loans, including loans that are in default. Loan
terms that may be modified include interest rates, required prepayments,
maturity dates, covenants, principal amounts and other loan terms. The terms and
conditions of each modification vary based on individual circumstances and will
be determined on a case by case basis. Our Manager monitors and evaluates each
of our loans held for investment and has maintained regular communications with
borrowers regarding the potential impacts of the COVID-19 pandemic on our loans.
CECL Reserve
In accordance with ASC 326, we record allowances for our loans held for
investment. The allowances are deducted from the gross carrying amount of the
assets to present the net carrying value of the amounts expected to be collected
on such assets. The Company estimates its CECL Reserve using among other inputs,
third-party valuations, and a third-party probability-weighted model that
considers the likelihood of default and expected loss given default for each
individual loan based on the risk profile for approximately three years after
which we immediately revert to use of historical loss data.
ASC 326 requires an entity to consider historical loss experience, current
conditions, and a reasonable and supportable forecast of the macroeconomic
environment. We consider multiple datapoints and methodologies that may include
likelihood of default and expected loss given default for each individual loans,
valuations derived from discount cash flows ("DCF"), and other inputs including
the risk rating of the loan, how recently the loan was originated compared to
the measurement date, and expected prepayment, if applicable. The measurement of
expected credit losses under CECL is applicable to financial assets measured at
amortized cost, and off-balance sheet credit exposures such as unfunded loan
commitments.
27
We evaluate our loans on a collective (pool) basis by aggregating on the basis
of similar risk characteristics as explained above. We make the judgment that
loans to cannabis-related borrowers that are fully collateralized by real estate
exhibit similar risk characteristics and are evaluated as a pool. Further, loans
that have no real estate collateral, but are secured by other forms of
collateral, including equity pledges of the borrower, and otherwise have similar
characteristics as those collateralized by real estate are evaluated as a pool.
All other loans are analyzed individually, either because they operate in a
different industry, may have a different risk profile, or have maturities that
extend beyond the forecast horizon for which we are able to derive reasonable
and supportable forecasts.
Estimating the CECL Reserve also requires significant judgment with respect to various factors, including (i) the appropriate historical loan loss reference data, (ii) the expected timing of loan repayments, (iii) calibration of the likelihood of default to reflect the risk characteristics of our loan portfolio, and (iv) our current and future view of the macroeconomic environment. From time to time, we may consider loan-specific qualitative factors on certain loans to estimate our CECL Reserve, which may include (i) whether cash from the borrower's operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and (iii) the liquidation value of collateral. For loans where we have deemed the borrower/sponsor to be experiencing financial difficulty, we may elect to apply a practical expedient, in which the fair value of the underlying collateral is compared to the amortized cost of the loan in determining a CECL Reserve.
To estimate the historic loan losses relevant to our portfolio, we evaluate our historical loan performance, which includes zero realized loan losses since our inception of operations. Additionally, we analyzed our repayment history, noting we have limited "true" operating history, since the incorporation date ofMarch 30, 2021 . However, our Sponsor has had operations for the past two fiscal years and has made investments in similar loans that have similar characteristics, including interest rate, collateral coverage, guarantees, and prepayment/make whole provisions, which fall into the pools identified above. Given the similarity of the structuring of the credit agreements for the loans in our portfolio, management considered it appropriate to consider the past repayment history of loans originated by the Sponsor in determining the extent to which we should record a CECL Reserve. In addition, we review each loan on a quarterly basis and evaluate the borrower's ability to pay the monthly interest and principal, if required, as well as the loan-to-value (LTV) ratio. In considering the potential current expected credit loss, the Manager primarily considers significant inputs to our forecasting methods, which include (i) key loan-specific inputs such as the value of the real estate collateral, liens on equity (including the equity in the entity that holds the state-issued license to cultivate, process, distribute, or retail cannabis), presence of personal or corporate guarantees, among other credit enhancements, LTV ratio, ratio type (fixed or floating) and IRR, loan-term, geographic location, and expected timing and amount of future loan fundings, (ii) performance against the underwritten business plan and our internal loan risk rating and (iii) a macro-economic forecast. Estimating the enterprise value of our borrowers in order to calculate LTV ratios is often a significant estimate. We rely primarily on comparable transactions to estimate enterprise value of our portfolio companies and supplement such analysis with a multiple-based approach to enterprise value to revenue multiples of publicly-traded comparable companies obtained from S&P CapitalIQ as of the quarter end, to which we apply a private company discount based on our current borrower profile. These estimates may change in future periods based on available future macro-economic data and might result in a material change in our future estimates of expected credit losses for our loan portfolio. Regarding real estate collateral, we generally cannot take the position of mortgagee-in-possession as long as the property is used by a cannabis operator, but we can request that the court appoint a receiver to manage and operate the subject real property until the foreclosure proceedings are completed. Additionally, while we cannot foreclose under state Uniform Commercial Code ("UCC") and take title or sell equity in a licensed cannabis business, a potential purchaser of a delinquent or defaulted loan could. In order to estimate the future expected loan losses relevant to our portfolio, we utilize historical market loan loss data obtained from a third-party database for commercial real estate loans, which we believe is a reasonably comparable and available data set to use as an input for our type of loans. We expect this dataset to be representative for future credit losses whilst considering that the cannabis industry is maturing, and consumer adoption, demand for production, and retail capacity are increasing akin to commercial real estate over time. For periods beyond the reasonable and supportable forecast period, we revert back to historical loss data. 28 All of the above assumptions, although made with the most available information at the time of the estimate, are subjective and actual activity may not follow the estimated schedule. These assumptions impact the future balances that the loss rate will be applied to and as such impact our CECL Reserve. As we acquire new loans and our Manager monitors loan and borrower performance, these estimates will be revised each period. Risk Ratings
We assess the risk factors of each loan, and assign a risk rating based on a variety of factors, including, without limitation, payment history, real estate collateral coverage, property type, geographic and local market dynamics, financial performance, enterprise value of the portfolio company, loan structure and exit strategy, and project sponsorship. This review is performed quarterly. Based on a 5-point scale, our loans are rated "1" through "5," from less risk to greater risk, which ratings are defined as follows: Rating Definition 1 Very low risk 2 Low risk 3 Moderate/average risk 4 High risk/potential for loss: a loan that has a risk of realizing a
principal loss 5 Impaired/loss likely: a loan that has a high risk of realizing principal
loss, has incurred principal loss or an impairment has been recorded
The risk ratings are primarily based on historical data and current conditions specific to each portfolio company, as well as consideration of future economic conditions and each borrower's estimated ability to meet debt service requirements. The declines in risk ratings shown in the following table fromDecember 31, 2021 toSeptember 30, 2022 , are not due to any borrower specific credit issues relating to the borrowers, but rather, are primarily due to our quarterly re-evaluation of overall current macroeconomic conditions affecting our borrowers. This decline in risk ratings did not have a significant effect on the level of the current expected credit loss reserve because the loans continued to perform as expected and the fair value of the underlying collateral exceeded the amounts outstanding under the loans. As ofSeptember 30, 2022 andDecember 31, 2021 , the carrying value, excluding the CECL Reserve, of the Company's loans within each risk rating by year of origination is as follows: As of September 30, 2022 (1) Risk Rating 2022 2021 2020 2019 Total 1 $ -$ 20,542,981 $ 29,712,254 $ -$ 50,255,235 2 93,424,139 79,819,303 - - 173,243,442 3 30,130,650 77,446,220 - - 107,576,870 4 - - - - - 5 - - - - - Total$ 123,554,789 $ 177,808,504 $ 29,712,254 $ -$ 331,075,547
(1) Amounts are presented by loan origination year with subsequent advances shown
in the original year of origination.
As of December 31, 2021 (1)
Risk Rating 2021 2020 2019 Total
1 $ 135,076,307 $ 32,242,114 $ 590,384 $ 167,908,805
2 29,075,761 - - 29,075,761
3 - - - -
4 - - - -
5 - - - -
Total $ 164,152,068 $ 32,242,114 $ 590,384 $ 196,984,566 (1) Amounts are presented by loan origination year with subsequent advances shown
in the original year of origination.
29
Non-GAAP Measures and Key Financial Measures and Indicators
As a commercial real estate finance company, we believe the key financial measures and indicators for our business are Distributable Earnings, Adjusted Distributable Earnings, book value per share, and dividends declared per share.
Distributable Earnings and Adjusted Distributable Earnings
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).
We believe providing Distributable Earnings and Adjusted Distributable Earnings
on a supplemental basis to our net income as determined in accordance with GAAP
is helpful to stockholders in assessing the overall performance of our business.
As a REIT, we are required to distribute at least 90% of our annual REIT taxable
income and to pay tax at regular corporate rates to the extent that we annually
distribute less than 100% of such taxable income. Given these requirements and
our belief that dividends are generally one of the principal reasons that
stockholders invest in our common stock, we generally intend to attempt to pay
dividends to our stockholders in an amount equal to our net taxable income, if
and to the extent authorized by our Board. Distributable Earnings is one of many
factors considered by our Board in authorizing dividends and, while not a direct
measure of net taxable income, over time, the measure can be considered a useful
indicator of our dividends.
Distributable Earnings and Adjusted Distributable Earnings should not be
considered as substitutes for GAAP net income. We caution readers that our
methodology for calculating Distributable Earnings and Adjusted Distributable
Earnings may differ from the methodologies employed by other REITs to calculate
the same or similar supplemental performance measures, and as a result, our
reported Distributable Earnings and Adjusted Distributable Earnings may not be
comparable to similar measures presented by other REITs.
The following table provides a reconciliation of GAAP net income to
Distributable Earnings and Adjusted Distributable Earnings (in thousands, except
per share data):
Period from
For the For the For the March 30,
three months three months nine months 2021
ended ended ended (inception) to
September 30, September 30, September 30, September 30,
2022 2021 2022 2021
Net Income $ 9,768,969 $
4,067,521
84,891 - 328,356 -
Depreciation and amortization 138,549 25,206 379,644 41,918
Provision for current expected credit
losses 306,885 - 1,403,892 -
Distributable Earnings $ 10,299,294 $
4,092,727
- - - -
Adjusted Distributable Earnings 10,299,294 4,092,727 27,148,652 5,177,990
Basic weighted average shares of common
stock outstanding (in shares) 17,657,913 4,895,694 17,652,367 3,658,310
Adjusted Distributable Earnings per
Weighted Average Share $ 0.58 $ 0.84 $ 1.54 $ 1.42
Diluted weighted average shares of common
stock outstanding (in shares) 17,752,290 4,895,694 17,747,612 3,658,310
Adjusted Distributable Earnings per
Weighted Average Share $ 0.58 $ 0.84 $ 1.53 $ 1.42
30
Book Value Per Share
The book value per share of our common stock as of
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders, and meet other general business needs. We use significant cash to invest in loans, repay principal and interest on our borrowings, make distributions to our stockholders, and fund our operations.
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. 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. In the future, 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. 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 in the near future. As ofSeptember 30, 2022 andDecember 31, 2021 , all of our cash was unrestricted and totaled approximately$9.3 million and$80.2 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. Credit Facilities InMay 2021 , in connection with our acquisition of our financing subsidiary, CAL, we were assigned a secured revolving credit facility (the "Revolving Loan"). The Revolving Loan had an aggregate borrowing base of up to$10,000,000 and bore interest, payable in cash in arrears, at a per annum rate equal to the greater of (x) Prime Rate plus 1.00% and (y) 4.75%. We incurred debt issuance costs of$100,000 related to the origination of the Revolving Loan, which were capitalized and are subsequently being amortized through maturity. The maturity date of the Revolving Loan was the earlier of (i)February 12, 2023 and (ii) the date on which the Revolving Loan is terminated pursuant to terms in the Revolving Loan agreement. OnDecember 16, 2021 , we amended the Revolving Loan (the "First Amendment"). The First Amendment increased the loan commitment from$10,000,000 to$45,000,000 , decreased the interest rate, from the greater of the (1) Prime Rate plus 1.00% and (2) 4.75% to the greater of (1) the Prime Rate plus the applicable margin and (2) 3.25%. The applicable margin depends on the ratio of debt to equity of CAL and increases from 0% at a ratio of 0.25 to 1 to 1.25% at a ratio of 1.5 to 1. The First Amendment also extended the maturity date fromFebruary 12, 2023 to the earlier of (i)December 16, 2023 and (ii) the date on which the Revolving Loan is terminated pursuant to terms in the Revolving Loan agreement. We incurred debt issuance costs of$859,500 related to the First Amendment, which were capitalized and are subsequently being amortized through maturity. 31 OnMay 12, 2022 , we amended the Revolving Loan (the "Second Amendment") which provides for an increase in the aggregate commitment from$45 million to$65 million . No other material terms of the Revolving Loan were modified as a result of the execution of the Second Amendment. As ofSeptember 30, 2022 andDecember 31, 2021 , unamortized debt issuance costs related to the Revolving Loan and First and Second Amendments of$665,639 and$868,022 , respectively, are recorded in other receivables and assets, net on the consolidated balance sheets. OnNovember 7, 2022 , we amended the Revolving Loan (the "Third Amendment"), whereby we exercised the existing accordion feature of the Revolving Loan to increase the aggregate commitment by$27.5 million , from$65 million to$92.5 million . No other material terms of the Revolving Loan were modified as a result of the execution of the Third Amendment. The Revolving Loan incurs unused fees at a rate of 0.25% per annum. During the nine month period endedSeptember 30, 2022 , we incurred$11,833 in unused fees in connection with the Second Amendment. For the period fromJanuary 1, 2022 toSeptember 30, 2022 , we borrowed$53.0 million against the Revolving Loan and incurred approximately$1.0 million in interest expense for the period then ended. In the future, we may use certain sources of financing to fund the origination or acquisition of our target investments, including credit facilities and other secured and unsecured forms of borrowing. These financings may be collateralized or non-collateralized and may involve one or more lenders. We expect that these facilities will typically have maturities ranging from two to five years and may accrue interest at either fixed or floating rates. The First Amendment and the Second Amendment provide for certain affirmative covenants, including requiring us to deliver financial information and any notices of default, and conducting business in the normal course. Additionally, the Company must comply with certain financial covenants including: (1) maximum capital expenditures of$150,000 , (2) maintaining a debt service coverage ratio greater than 1.35 to 1, and (3) maintaining a leverage ratio less than 1.50 to 1. To the best of our knowledge, as ofSeptember 30, 2022 , we were in compliance in all material respects with the covenants with respect to the Revolving Loan. During the period endedSeptember 30, 2022 , we borrowed$53.0 million against the Revolving Loan and had$53.0 million outstanding atSeptember 30, 2022 . For the period endedDecember 31, 2021 we did not borrow against the Revolving Loan and therefore had$0 outstanding under the Revolving Loan as of such date.
Capital Markets
We may seek to raise further equity capital and issue debt securities in order to fund our future investments in loans.
Cash Flows The following table sets forth changes in cash for the nine months endedSeptember 30, 2022 and the periodMarch 30, 2021 (inception) toSeptember 30, 2021 , respectively: Period from For theMarch 30 , nine months 2021 ended (inception) toSeptember 30 ,September 30, 2022 2021 (unaudited) (unaudited) Net income $
25,036,760
(12,658,931 ) 7,105,497
Net cash provided by operating activities 12,377,829 12,241,569
Net cash used in investing activities (120,724,572 ) (94,591,731 )
Net cash provided by financing activities 37,429,747 90,992,068
Change in cash and cash equivalents $ (70,916,996 ) $ 8,641,906
32
Net Cash Provided by Operating Activities
For the nine months endedSeptember 30, 2022 , net cash provided by operating activities totaled approximately$12.4 million . For the nine months endedSeptember 30, 2022 , adjustments to net income related to operating activities primarily included accretion of deferred loan original issue discount and other discounts of approximately$2.1 million , PIK interest of approximately$4.1 million , provision for current expected credit losses of approximately$1.4 million , amortization of deferred financing costs relating to the revolving credit facility of$379,644 , and stock-based compensation expense of$328,356 . Additionally, other changes in operating assets and liabilities were approximately$8.5 million , of which approximately$9.9 million is attributable to interest reserves disbursed, a$529,544 increase in interest receivable, and a$172,699 increase in other receivables offset by a$545,127 increase in management fee payable and an approximately$1.6 million increase in accounts payable and other accrued expenses. During the periodMarch 30, 2021 (inception) throughSeptember 30, 2021 , net cash provided by operating activities total approximately$12.2 million . For the periodMarch 30, 2021 (inception) throughSeptember 30, 2021 , adjustments to net income related to operating activities primarily included accretion of deferred loan original issue discount and other discounts of approximately$277,000 , PIK interest of approximately$278,000 , and amortization of deferred financing costs relating to the revolving credit facility of approximately$42,000 . Additionally, other changes in operating assets and liabilities were approximately$7.6 million , of which approximately$6.6 million is attributable to new interest reserves, a$517,026 increase in interest receivable, a$84,384 increase in other assets, a$13,868 increase in other receivables, a$800,000 decrease in escrow payable, and an approximately$843,000 increase in accounts payable and other accrued expenses.
For the nine months endedSeptember 30, 2022 , net cash used in investing activities totaled approximately$120.7 million . The net cash used in investing activities was primarily a result of the cash used for the origination and funding of loans held for investment of approximately$134.3 million , exceeding the cash received from the principal repayment of loans held for investment of approximately$6.9 million and approximately$6.7 million received from the sales of loans for the nine months endedSeptember 30, 2022 . During the periodMarch 30, 2021 (inception) throughSeptember 30, 2021 , net cash used in investing activities totaled approximately$94.6 million . The cash used in investing activities was primarily a result of the cash used for the origination and funding of loans held for investment of approximately$104.2 million , exceeding the cash received from principal repayment of loans held for investment of approximately$9.6 million for the periodMarch 30, 2021 (inception) throughSeptember 30, 2021 .
Net Cash Provided by Financing Activities
For the nine months endedSeptember 30, 2022 , net cash provided by financing activities totaled approximately$37.4 million and related to drawdowns on the revolving credit facility of$53.0 million , approximately$4.5 million in proceeds received from the underwriters' partial exercise of their over-allotment option, less approximately$19.9 million in dividends paid and offering costs relating to our initial public offering of approximately$24,000 and$177,261 in debt issuances costs paid, During the period fromMarch 30, 2021 (inception) throughSeptember 30, 2021 , we received approximately$91.0 million in cash from financing activities related to proceeds received from the issuance of shares of our common stock of approximately$92.5 million offset by dividends paid of approximately$1.1 million and payment of deferred offering costs of approximately$485,000 . Leverage Policies
Although we are not required to maintain any particular leverage ratio, we
expect to employ prudent amounts of leverage and, when appropriate, to use debt
as a means of providing additional funds for the acquisition of loans, to
refinance existing debt or for general corporate purposes. Leverage is primarily
used to provide capital for forward commitments until additional equity is
raised or additional medium- to long-term financing is arranged. This policy is
subject to change by management and our Board.
33
Dividends
We have elected to be taxed as a REIT forUnited States federal income tax purposes and, as such, anticipate annually distributing to our stockholders at least 90% of our REIT taxable income, prior to the deduction for dividends paid and our net capital gain. If 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 (i) 85% of our ordinary income for the calendar year, (ii) 95% of our capital gain net income for the calendar year and (iii) any 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 non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed. Any of these taxes would decrease cash available for distribution to our stockholders. 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. 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. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax. If we determine that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend distributions (including capital gains dividends) for the current year from such income, we accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned. To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may be required to fund distributions from working capital or through equity, equity-related or debt financings or, in certain circumstances, asset sales, as to which our ability to consummate transactions in a timely manner on favorable terms, or at all, cannot be assured, or we may make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of
debt securities.
The following table summarizes the Company's dividends declared during the nine
months ended
Common Share Taxable
Distribution Ordinary Return of Section 199A
Record Date Payment Date Amount Income Capital DividendsRegular cash dividend 3/31/2022 4/14/2022 $ 0.40$ 0.40 $ - $ 0.40 Regular cash dividend 6/30/2022 7/15/2022 $ 0.47$ 0.47 $ - $ 0.47 Regular cash dividend 9/30/2022 10/14/2022 $ 0.47$ 0.47 $ - $ 0.47 Total cash dividend $ 1.34$ 1.34 $ - $ 1.34
Accounting Policies and Estimates
As ofSeptember 30, 2022 , there were no significant changes in the application of our accounting policies or estimates from those presented in our annual report on Form 10-K. Refer to Note 2 to our consolidated financial statements for the nine months endedSeptember 30, 2022 , titled "Significant Accounting Policies" for information on recent accounting pronouncements.
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