Loans Held For Investment, Net

3 Months Ended

Mar. 31, 2022

Loans Held For Investment Net [Abstract]

LOANS HELD FOR INVESTMENT, NET

3. LOANS HELD FOR INVESTMENT, NET

As of March 31, 2022 and December 31, 2021, the Company’s portfolio was comprised of 22 and 21 loans, respectively, held on the consolidated balance sheet at amortized cost. The Company’s aggregate loan commitments and outstanding principal were approximately $321.1 million and $282.7 million as of March 31, 2022, and $235.1 million and $200.6 million as of December 31, 2021. For the three months ended March 31, 2022, the Company funded approximately $86.7 million in new loan principal.

As of March 31, 2022 and 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 March 31, 2022 and December 31, 2021, approximately 63.4% 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 prime rate floors. The outstanding principal of these loans was approximately $179.2 million and $106.7 million as of March 31, 2022 and December 31, 2021, respectively.

The remaining 36.6% and 46.8% of the portfolio as of March 31, 2022 and December 31, 2021, respectively, was comprised of fixed rate loans that had outstanding principal of approximately $103.5 million and $93.9 million.

The following tables summarize the Company’s loans held for investment as of March 31, 2022 and December 31, 2021:

	As of March 31, 2022
	Outstanding Principal (1)		Original Issue Discount			Carrying Value (1)			Weighted Average Remaining Life (Years)(2)
Senior Term Loans	$	282,708,732	$	(3,881,818	)	$	278,826,914			2.4
Total loans held at carrying value		282,708,732		(3,881,818	)		278,826,914			2.4
Allowance for credit losses		N/A		N/A			(182,838	)
Total loans held at carrying value, net	$	282,708,732	$	(3,881,818	)	$	278,644,076

(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 March 31, 2022

	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 tables presents changes in loans held at carrying value as of and for the three months ended March 31, 2022. The Company had no loans held at carrying value as of March 31, 2021.

	Principal			Original Issue Discount			Allowance for Credit Losses			Carrying Value
Balance at December 31, 2021	$	200,632,056		$	(3,647,490	)	$	(134,542	)	$	196,850,024
New fundings		86,725,308			(1,128,415	)		-			85,596,893
Principal repayment of loans		(5,619,201	)		-			-			(5,619,201	)
Accretion of original issue discount		-			894,087			-			894,087
PIK Interest		970,569			-			-			970,569
Provision for credit losses		-			-			(48,296	)		(48,296	)
Balance at March 31, 2022	$	282,708,732		$	(3,881,818	)	$	(182,838	)	$	278,644,076

A more detailed listing of the Company’s loans held at carrying value portfolio based on information available as of March 31, 2022, is as follows:

Loan		Location	Outstanding Principal(1)		Original Issue Premium/(Discount)			Carrying Value(1)			Contractual Interest Rate(4)	Maturity Date(2)		Payment Terms(3)
	1	Michigan		537,500		19,308			556,808		15.00%		12/31/2022		P&I
	2	Various		30,000,000		(517,906	)		29,482,094		10.07%(6)		5/30/2023		I/O
	3	Pennsylvania		6,957,500		(239,669	)		6,717,831		P + 11.00%(5)		1/31/2025		P&I
	4	Michigan		29,333,311		(149,336	)		29,183,975		P + 6.65%(5) Cash, 2.5% PIK		12/31/2024		P&I
	5	Various		19,321,082		(583,643	)		18,737,439		13.625% Cash, 2.75% PIK		3/31/2024		P&I
	6	Arizona		11,061,997		-			11,061,997		19.85%(7)		4/28/2023		P&I
	7	Massachusetts		1,500,000		-			1,500,000		P + 12.25%(5)		4/28/2023		P&I
	8	Pennsylvania		13,235,127		-			13,235,127		P + 10.75%(5) Cash, 4% PIK(8)		5/31/2025		P&I
	9	Michigan		4,500,000		(7,560	)		4,492,440		P + 9.00%(5)		2/20/2024		P&I
	10	Various		19,388,944		(238,164	)		19,150,780		13% Cash, 1% PIK		8/30/2024		P&I
	11	West Virginia		9,599,451		(153,282	)		9,446,169		P + 9.25%(5) Cash, 2% PIK		9/1/2024		P&I
	12	Pennsylvania		15,263,207		-			15,263,207		P + 10.75%(5) Cash, 3% PIK		6/30/2024		P&I
	13	Michigan		392,009		-			392,009		11.00%		9/30/2024		P&I
	14	Maryland		20,203,076		(500,365	)		19,702,711		P + 8.75%(5) Cash, 2% PIK		9/30/2024		I/O
	15	Various		12,000,000		(260,570	)		11,739,430		13.00%		10/31/2024		P&I
	16	Michigan		10,600,000		(89,946	)		10,510,054		P + 7.00%(5)		11/22/2022		I/O
	17	Various		5,000,000		-			5,000,000		15% Cash, 2.5% PIK		12/27/2026		P&I
	18	Michigan		3,646,200		(78,658	)		3,567,542		10.50% Cash, 1% to 5% PIK(9)		12/29/2023		I/O
	19	Various		7,500,000		(68,778	)		7,431,222		P + 9.25%(5)		12/31/2024		I/O
	20	Florida		15,000,000		(357,104	)		14,642,896		11.00%		1/31/2025		P&I
	21	Ohio		30,140,161		(570,026	)		29,570,135		P + 8.25%(5) Cash, 3% PIK		2/28/2025		P&I
	22	Florida		17,529,167		(86,119	)		17,443,048		11.00% Cash, 3% PIK		8/29/2025		P&I
	Current expected credit loss reserve			-		-			(182,838	)
	Total loans held at carry value			282,708,732		(3,881,818	)		278,644,076

(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)	P = prime rate and depicts floating rate loans that pay interest at the prime rate plus a specific percentage; “PIK” = paid in kind interest.
(5)	This loan is subject to a 3.25% prime rate floor.
(6)	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.

(7)	The aggregate loan commitment to Loan #6 includes a $8.9 million initial commitment which has a base interest rate of 15.25% and PIK interest rate of 2%, and a second commitment of $2.0 million which has an interest rate of 39%. The statistics presented reflect the weighted average of the terms under both advances for the total aggregate loan commitment.
(8)	Subject to adjustment not below 2% if borrower receives at least two consecutive quarters of positive cash flow after the closing date.

(9) 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 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.

As of March 31, 2022, all loans are current, and none have been placed on non-accrual status. The aggregate fair value of the Company’s loan portfolio was $279,085,998 and $197,901,779, with gross unrecognized holding gains of $259,084 and $917,213 as of March 31, 2022 and December 31, 2021, respectively.  The fair values, which are classified as Level 3 in the fair value hierarchy (Note 2), are estimated using 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 March 31, 2022 and December 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 March 31, 2022
Risk Rating	2022		2021		2020		2019		Total
1		-		122,035,698		29,482,094		556,808		152,074,600
2		90,840,054		29,194,429		6,717,831		-		126,752,314
3		-		-		-		-		-
4		-		-		-		-		-
5		-		-		-		-		-
Total		90,840,054		151,230,127		36,199,925		556,808		278,826,914

	As of December 31, 2021
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

Real estate collateral coverage is also a significant credit quality indicator, and real estate collateral coverage, excluding the CECL reserve, was as follows as of March 31, 2022 and December 31, 2021:

As of March 31, 2022
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	$	5,000,000	$	-	$	17,443,048	$	-	$	-	$	79,531,559	$	101,974,607
Floating-rate		15,649,053		15,263,207		48,307,574		39,658,934		24,297,124		33,676,415		176,852,307
	$	20,649,053	$	15,263,207	$	65,750,622	$	39,658,934	$	24,297,124	$	113,207,974	$	278,826,914

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. 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 seven 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 March 31, 2022, 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 three months ended March 31, 2022 was as follows:

	Outstanding(1)		Unfunded(2)		Total
Balance at December 31, 2021	$	134,542	$	13,407	$	147,949
Provision for current expected credit losses		48,296		3,047		51,343
Balance at March 31, 2022	$	182,838	$	16,454	$	199,292

(1) As of March 31, 2022, 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 March 31, 2022, 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, ($373,695 as of March 31, 2022) 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 March 31, 2022 there were no loans with principal or interest greater than 30 days past due.