Loans Held For Investment, Net

9 Months Ended

Dec. 31, 2021

Loans Held For Investment Net [Abstract]

LOANS HELD FOR INVESTMENT, NET

3. LOANS HELD FOR INVESTMENT, NET

As of December 31, 2021, the Company’s portfolio included twenty-one loans held on the consolidated balance sheet at amortized cost. The aggregate originated commitment under these loans was approximately $235.1 million and outstanding principal was approximately $200.6 million as of December 31, 2021. During the period from March 30, 2021 (inception) to December 31, 2021, the Company funded approximately $174.4 million of outstanding principal in addition to approximately $40.2 million of outstanding principal contributed from affiliates of the Manager (see Note 7). As of December 31, 2021, the Company did not have any loans held for investment with floating interest rates tied to the London Inter-bank Offered Rate (“LIBOR”). As of December 31, 2021, approximately 53.4% 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 of 3.25%. The carrying value of these loans was approximately $106.7 million as of December 31, 2021. The remaining 46.4% of the portfolio was comprised of fixed rate loans that had a carrying value of approximately $91.3 million as of December 31, 2021.

The following tables summarize the Company’s loans held for investment as of December 31, 2021:

	Outstanding Principal (1)		Original Issue Discount			Carrying Value (1)			Weighted Average Remaining Life (Years) (2)
Senior Term Loans	$	200,632,056	$	(3,647,490	)	$	196,984,566			2.2
Total loans held at carrying value		200,632,056		(3,647,490	)		196,984,566			2.2
Allowance for credit losses		N/A		N/A			(134,542	)
Total loans held at carrying value, net	$	200,632,056	$	(3,647,490	)	$	196,850,024

(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

The following table presents changes in loans held at carrying value as of and for the period from March 30, 2021 (inception) to December 31, 2021:

	Principal			Original Issue Discount			Allowance for Credit Losses			Carrying Value
Balance at March 30, 2021 (inception)	$	-		$	-		$	-		$	-
Loans contributed		40,191,921			(846,724	)		-			39,345,197
New fundings		174,445,480			(3,529,406	)		-			170,916,074
Principal repayment of loans		(9,798,364	)		-			-			(9,798,364	)
Accretion of original issue discount		-			595,872			-			595,872
Sale of loans		(5,005,000	)		132,768			-			(4,872,232	)
PIK Interest		798,019			-			-			798,019
Provision for credit losses		-			-			(134,542	)		(134,542	)
Balance at December 31, 2021	$	200,632,056		$	(3,647,490	)	$	(134,542	)	$	196,850,024

A more detailed listing of the Company’s loans held at carrying value portfolio based on information available as of December 31, 2021, is as follows:

Loan	Location		Outstanding Principal(1)	Original Issue Premium/(Discount)			Carrying Value(1)			Contractual Interest Rate			Maturity Date(2)	Payment Terms(3)
1	Michigan	$	567,500	$	22,884		$	590,384			15.00	%	12/31/2022	P&I
2	Various		30,000,000		(631,099	)		29,368,901			10.07	%(4)	5/30/2023	I/O
3	Pennsylvania		2,957,500		(84,286	)		2,873,214			14.25	%	11/30/2023	P&I
4	Michigan		11,875,167		(50,650	)		11,824,517			13.25	%(9)	3/31/2022	P&I
5	Various		17,410,081		(652,096	)		16,757,985			16.38	%(6)	3/31/2024	P&I
6	Arizona		9,984,409		-			9,984,409			19.85	%(11)	4/28/2023	P&I
7	Massachusetts		1,500,000		-			1,500,000			15.50	%	4/28/2023	P&I
8	Pennsylvania		13,103,653		-			13,103,653			18.00	%(10)	5/31/2025	P&I
9	Michigan		4,500,000		(8,545	)		4,491,455			12.25	%	2/20/2024	P&I
10	Various		19,340,552		(262,438	)		19,078,114			14.00	%(8)	8/30/2024	P&I
11	West Virginia		9,457,895		(168,870	)		9,289,025			14.50	%(12)	9/1/2024	P&I
12	Pennsylvania		15,149,304		-			15,149,304			17.00	%(7)	6/30/2024	P&I
13	Michigan		431,210		-			431,210			11.00	%	9/30/2024	P&I
14	Illinois		3,100,000		(13,702	)		3,086,298			17.00	%	3/21/2022	I/O
15	Maryland		20,102,396		(549,635	)		19,552,761			14.00	%(5)	9/30/2024	I/O
16	Various		12,000,000		(527,964	)		11,472,036			13.00	%	10/31/2024	P&I
17	Michigan		10,600,000		(122,808	)		10,477,192			10.25	%	11/30/2022	I/O
18	Various		5,001,389		-			5,001,389			17.50	%(14)	12/27/2026	P&I
19	Michigan		3,601,000		(89,753	)		3,511,247			15.50	%(13)	12/29/2023	I/O
20	Various		2,450,000		(433,596	)		2,016,404			8.50	%	3/29/2022	I/O
21	Florida		7,500,000		(74,932	)		7,425,068			12.50	%	12/31/2024	P&I
Current expected credit loss reserve			-		-			(134,542	)
Total loans held at carry value			$200,632,056	$	(3,647,490	)	$	196,850,024			14.0	%

(1) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted purchase discount, deferred loan fees and loan origination costs

(2) Certain loans are subject to contractual extension options and may be subject to performance based or other conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without paying a prepayment penalty. The Company may also extend contractual maturities and amend other terms of the loans in connection with loan modifications.

(3) P/I = principal and interest. I/O = interest only. P/I loans may include interest only periods for a portion of the loan term.

(4) The aggregate loan commitment to Loan #2 includes a $4.005 million initial advance, which has an interest rate of 15.25%, a second advance of $15.995 million, which has an interest rate of 9.75%, and a third advance of $10.0 million, which has an interest rate of 8.5%. The statistics presented reflect the weighted average of the terms under all advances for the total aggregate loan commitment.

(5) Base interest rate of 12% and PIK interest rate of 2%

(6) Base interest rate of 13.625% and PIK interest rate of 2.75%

(7) Base interest rate of 14% and PIK interest rate of 3%

(8) Base interest rate of 13% and PIK interest rate of 1%

(9) The aggregate loan commitment to Loan #4 includes a $7.875 million initial advance, which has an interest rate of P + 10.00%, and a second advance of $4.0 million, which has an interest rate of P + 10.00%. The statistics presented reflect the weighted average of the terms under both advances for the total aggregate loan commitment.

(10) Base interest rate of 14% and PIK interest rate of 4%

(11) The aggregate loan commitment to Loan #6 includes $7.9 million advanced under a delayed draw term loan, which has a base interest rate of 15.00% and PIK interest rate of 2%, and a second advance of $2.0 million, which has an interest rate of 39%. The statistics presented reflect the weighted average of the terms under all advances for the total aggregate loan commitment.

(12)	Base interest rate of 12.5% and PIK interest rate of 2%
(13)	Base interest rate of 10.5% and PIK is variable with an initial rate of five percent (5.00%) per annum, until Borrower’s delivery to Administrative Agent and the Lenders of audited financial statements for the Fiscal Year ending December 31, 2021, at which time the PIK Interest Rate shall equal a rate of One percent (1.00%) if EBITDA is greater than $6,000,000; three percent (3.00%) if EBITDA is greater than $4,000,000 and less than or equal to $6,000,000; or will remain at five percent (5.00%) if EBITDA is less than $4,000,000.
(14)	Base interest rate of 15% and PIK interest rate of 2.5%

As of December 31, 2021, all loans are current, and none have been placed on non-accrual status. The aggregate fair value of the Company’s loan portfolio was $197,901,779, with gross unrecognized holding gains of $917,213.  The fair values, which are classified as Level 3 in the fair value hierarchy (Note 2), are estimated using internally developed discounted cash flow models based on current market inputs for similar types of arrangements. The primary sensitivity in these models is based on the selection of appropriate discount rates. Fluctuations in these assumptions could result in different estimates of fair value.

Credit Quality Indicators

The Company assesses the risk factors of each loan, and assigns 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, the Company’s 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.

As of December 31, 2021, the carrying value of loans held for investment, net, excluding the CECL reserve, within each risk rating by year of origination is as follows:

Risk Rating	2021		Total
1	$	167,908,805	$	167,908,805
2		29,075,761		29,075,761
3		-		-
4		-		-
5		-		-
Total	$	196,984,566	$	196,984,566

Real estate collateral coverage is also a significant credit quality indicator, and collateral coverage was as follows as of December 31, 2021:

	Real Estate Collateral Coverage
	< 1.0x		1.0x - 1.25x		1.25x - 1.5x		1.50x - 1.75x		1.75x - 2.0x		> 2.0x		Total
Fixed-rate	$	7,017,793	$	-	$	35,836,099	$	3,086,298	$	-	$	45,373,778	$	91,313,968
Floating-rate		8,925,068		18,022,518		-		30,029,953		32,377,087		16,315,972		105,670,598
	$	15,942,861	$	18,022,518	$	35,836,099	$	33,116,251	$	32,377,087	$	61,689,750	$	196,984,566

CECL Reserve

The Company records allowances for its 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 a 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. Previously, the Company utilized the weighted average remaining maturity (“WARM”) method. For the period ended December 31, 2021, the Company has concluded that the probability-of-default/loss-given-default method is a more suitable for our portfolio and sustainable as part of the Company’s operations and ongoing portfolio monitoring process. There is no material difference in the loan loss reserve outcome under this method, when compared to the previous method applied, and this constitutes a change in method of application of ASC 326, not a change in accounting estimate. In the future, we may use other acceptable methods, such as a discounted cash flow method, WARM method, or other methods permitted under the standard.

ASC 326 requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment. The Company evaluates its loans on a collective (pool) basis by aggregating on the basis of similar risk characteristics, primarily: (i) industry sector of the borrower, (ii) risk ratings, (iii) collateral type, (iv) term, among other characteristics. We make the judgment that loans to cannabis-related borrowers with risk ratings indicating very low or low risk (1 and 2, respectively) that are fully collateralized by real estate with short maturities of less than three years exhibit similar risk characteristics and are evaluated as a pool. Further, loans that are not fully collateralized by real estate, but 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, have higher risk, or 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 the Company’s loan portfolio and (iv) the Company’s current and future view of the macroeconomic environment. From time to time, the Company may consider loan-specific qualitative factors on certain loans to estimate its 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 the Company’s portfolio, the Company evaluates its historical loan performance, which includes zero realized loan losses since the inception of its operations. Additionally, the Company analyzed its repayment history, noting it has limited “true” operating history, since the incorporation date of March 30, 2021. However; the Company’s 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. The Sponsor has experienced prepayment on six loans since its inception history, and in no such case was an event of loss experienced. Given the similarity of the structuring of the credit agreements for the loans in the Company’s portfolio, management considered it appropriate to consider the past repayment history of loans originated by the Sponsor in determining the extent to which a CECL reserve shall be recorded.

In addition, the Company reviews each loan on a quarterly basis and evaluates the borrower’s ability to pay the monthly interest and principal, if required, as well as the loan-to-value (LTV) ratio. When evaluating qualitative factors that may indicate the need for a CECL Reserve, we forecast losses considering a variety of factors. In considering the potential current expected credit loss, the Manager primarily considered significant inputs to the Company’s 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, loan-term, geographic location, and expected timing and amount of future loan fundings, (ii) performance against the underwritten business plan and the Company’s internal loan risk rating and (iii) a macro-economic forecast. Regarding real estate collateral, the Company 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. 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 December 31, 2021, 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 the Company’s future estimates of expected credit losses for its loan portfolio.

In order to estimate the future expected loan losses relevant to the Company’s portfolio, the Company utilizes historical market loan loss data obtained from Federal Reserve economic data for bank business loans, which the Company believes is a reasonably comparable and available data set to its type of loans. We expect the period from 2018-2021 to be representative for future credit losses during the years of 2022-2024, as the cannabis industry is maturing, consumer adoption is increasing, and demand for production and retail capacity is increasing. For periods beyond the reasonable and supportable forecast period, the Company reverts back to historical loss data. 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.

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 the Company’s CECL Reserve. As the Company acquires new loans and the Manager monitors loan and sponsor performance, these estimates will be revised each period.

Activity related to the CECL Reserve for outstanding balances and unfunded commitments on the Company’s loans held at carrying value and loans receivable at carrying value as of and for the period ended December 31, 2021 was as follows:

	Outstanding(1)		Unfunded(2)		Total
Balance at March 30, 2021 (inception)	$	-	$	-	$	-
Provision for current expected credit losses		134,542		13,407		147,949
Write-off charged		-		-		-
Recoveries		-		-		-
Balance at December 31, 2021	$	134,542	$	13,407	$	147,949

(1) As of December 31, 2021, the CECL Reserve related to outstanding balances on loans at carrying value is recorded within current expected credit loss reserve in the Company’s consolidated balance sheets.

(2) As of December 31, 2021, the CECL Reserve related to unfunded commitments on loans at carrying value is recorded within accounts payable and accrued liabilities in the Company’s consolidated balance sheets.

The Company has made an accounting policy election to exclude accrued interest receivable, ($197,735 as of December 31, 2021) included in Interest Receivable on its consolidated balance sheet, from the amortized cost basis of the related loans held for investment in determining the CECL Reserve, as any uncollectible accrued interest receivable is written off in a timely manner. To date, the Company has had zero write-offs related to uncollectible interest receivable, but will discontinue accruing interest on loans if deemed to be uncollectible, with any previously accrued uncollected interest on the loan charged to interest income in the same period.

As of December 31, 2021 there were no loans with principal or interest greater than 30 days past due.