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Loans Held For Investment, Net

9 Months Ended

Sep. 30, 2022

Loans Held For Investment Net Abstract

3. LOANS HELD FOR INVESTMENT, NET

As of September 30, 2022 and December 31, 2021, the Company’s portfolio was comprised of loans to 22 and 21 portfolio companies, respectively, that the Company has the ability and intends to hold the loans to maturity. The portfolio loans are held on the consolidated balance sheet at amortized cost. The Company’s aggregate loan commitments and outstanding principal were approximately $348.9 million and $334.5 million, respectively as of September 30, 2022, and $235.1 million and $200.6 million as of December 31, 2021. During the three and nine months ended September 30, 2022, the Company funded approximately $5.7 million and $143.6 million, respectively, in new loan principal.

As of September 30, 2022 and December 31, 2021, approximately 59.7% and 53.2%, respectively, of the Company’s 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 $199.7 million and $106.7 million as of September 30, 2022 and December 31, 2021, respectively.

The remaining 40.3% and 46.8% of the portfolio as of September 30, 2022 and December 31, 2021, respectively, was comprised of fixed rate loans that had outstanding principal of approximately $134.8 million and $93.9 million.

The following tables summarize the Company’s loans held for investment as of September 30, 2022 and December 31, 2021:

			As of September 30, 2022						Weighted Average
	Outstanding Principal (1)		Original Issue Discount			Carrying Value (1)			Remaining Life (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	$	334,502,935	$	(3,427,388	)	$	329,577,614

			As of December 31, 2021						Weighted Average
	Outstanding Principal (1)		Original Issue Discount			Carrying Value (1)			Remaining Life (Years) (2)
Senior Term Loans	$	200,632,056	$	(3,647,490	)	$	196,984,566		2.2
Current expected credit loss reserve		-		-			(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, deferred loan fees and other upfront fees. Outstanding principal balance includes capitalized PIK interest, if applicable.

(2)	Weighted average remaining life is calculated based on the carrying value of the loans as of September 30, 2022 and December 31, 2021, respectively.

The following tables present changes in loans held at carrying value as of and for the nine months ended September 30, 2022 and the period from March 30, 2021 (inception) to September 30, 2021.

	Principal (1)			Original Issue Discount			Current Expected Credit Loss Reserve			Carrying Value (1)
Balance at December 31, 2021	$	200,632,056		$	(3,647,490	)	$	(134,542	)	$	196,850,024
Issuance of and funding of loans		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
Proceeds from sale of loans		(6,957,500	)		260,723			-			(6,696,777	)
PIK Interest		4,096,721			-			-			4,096,721
Current 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 other upfront fees. Outstanding principal balance includes capitalized PIK interest, if applicable.

	Principal (1)			Original Issue Discount			Current Expected Credit Loss Reserve		Carrying 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			-			-		278,079
Balance at September 30, 2021	$	129,238,217		$	(2,115,053	)	$	-	$	127,123,164

(1)

A more detailed listing of the Company’s loans held at carrying value based on information available as of September 30, 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)	Initial Funding Date
1	Various⁽⁶⁾		30,000,000		(287,746	)		29,712,254		10.07%⁽⁷⁾	5/30/2023	I/O	7/2/2020
2	Michigan		36,646,551		(182,125	)		36,464,426		P + 6.65%^(5)(11) Cash, 3.25% PIK	12/31/2024	P&I	3/5/2021
3	Various⁽⁶⁾		20,673,831		(444,457	)		20,229,374		13.91% Cash, 2.59% PIK⁽¹⁰⁾	11/29/2024	P&I	3/25/2021
4	Arizona		11,909,539		-			11,909,539		19.01%⁽⁸⁾	12/31/2023	P&I	4/19/2021
5	Massachusetts		1,500,000		-			1,500,000		P + 12.25%⁽⁵⁾	4/30/2023	P&I	4/19/2021
6	Pennsylvania		13,263,665		-			13,263,665		P + 10.75%⁽⁵⁾ Cash, 4% PIK⁽⁹⁾	5/31/2025	P&I	5/28/2021
7	Michigan		4,443,750		(5,558	)		4,438,192		P + 9.00%⁽⁵⁾	2/20/2024	P&I	8/20/2021
8	Various⁽⁶⁾		23,168,151		(242,929	)		22,925,222		13% Cash, 2.5% PIK	6/30/2025	P&I	8/24/2021
9	West Virginia		9,554,960		(121,586	)		9,433,374		P + 9.25%⁽⁵⁾ Cash, 2% PIK	9/1/2024	P&I	9/1/2021
10	Pennsylvania		15,536,102		-			15,536,102		P + 10.75%⁽⁵⁾ Cash, 3% PIK	6/30/2024	P&I	9/3/2021
11	Michigan		313,607		-			313,607		11.00%	9/30/2024	P&I	9/20/2021
12	Maryland		32,479,495		(714,967	)		31,764,528		P + 8.75%⁽⁵⁾ Cash, 2% PIK	9/30/2024	I/O	9/30/2021
13	Various⁽⁶⁾		20,000,000		(210,110	)		19,789,890		13.00%	10/31/2024	P&I	11/8/2021
14	Michigan		10,600,000		(22,487	)		10,577,513		P + 7.00%⁽⁵⁾	11/22/2022	I/O	11/22/2021
15	Various⁽⁶⁾		5,000,000		-			5,000,000		15% Cash, 2.5% PIK	12/27/2026	P&I	12/27/2021
16	Michigan		3,739,861		(56,096	)		3,683,765		10.50% Cash, 5% PIK	12/29/2023	I/O	12/29/2021
17	Various⁽⁶⁾		7,500,000		(56,267	)		7,443,733		P + 9.25%⁽⁵⁾	12/31/2024	I/O	12/30/2021
18	Florida		15,000,000		(293,989	)		14,706,011		11.00%	1/31/2025	P&I	1/18/2022
19	Ohio		30,602,729		(472,079	)		30,130,650		P + 8.25%⁽⁵⁾ Cash, 3% PIK	2/28/2025	P&I	2/3/2022
20	Florida		20,327,703		(84,518	)		20,243,185		11.00% Cash, 3% PIK	8/29/2025	P&I	3/11/2022
21	Missouri		17,204,978		(148,084	)		17,056,894		11.00% Cash, 3% PIK	5/30/2025	P&I	5/9/2022
22	Illinois		5,038,013		(84,390	)		4,953,623		P + 8.50% Cash, 3%⁽⁵⁾ PIK	6/30/2026	P&I	7/1/2022

Current expected credit loss reserve			-		-			(1,497,933	)
Total loans held at carrying value		$	334,502,935	$	(3,427,388	)	$	329,577,614

(1)

The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted original issue discounts, deferred loan fees and other upfront fees. Outstanding principal balance includes capitalized PIK interest, if applicable.

(2)

Certain loans are subject to contractual extension options and may be subject to performance based on 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 a contractual 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 prime rate floor.
(6)	Loans with material collateral in multiple jurisdictions, namely multi-state operators, are disclosed as “various.”
(7)	The aggregate loan commitment to Loan #1 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 8.50%. The statistics presented reflect the weighted average of the terms under all three advances for the total aggregate loan commitment.
(8)	The aggregate loan commitment to Loan #4 includes a $10.0 million initial advance, which has a base interest rate of 15.00%, 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 both advances for the total aggregate loan commitment.
(9)	Subject to adjustment not below 2% if borrower receives at least two consecutive quarters of positive cash flow after the closing date.
(10)	The aggregate loan commitment to Loan #3 includes a $15.9 million initial advance, which has a base interest rate of 13.625%, 2.75% PIK and a second advance of $4.2 million, which has an interest rate of 15.00%, 2.00% PIK. The statistics presented reflect the weighted average of the terms under both advances for the total aggregate loan commitment.
(11)	This Loan is subject to an interest rate cap.

As of September 30, 2022, all loans are current and none have been placed on non-accrual status. 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. The aggregate fair value of the Company’s loan portfolio was $328,984,374 and $197,901,779, with gross unrecognized holding losses of $2,091,173 and unrecognized holding gains of $917,213 as of September 30, 2022 and December 31, 2021, respectively. The fair values, which are classified as Level 3 in the fair value hierarchy, 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. As of September 30, 2022, the Company calculated the estimated fair value of the loans held for investment using unobservable inputs such as discount rates ranging from 11.36% to 24.79% with a weighted average discount rate of 17.54%.

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, loan to enterprise value and fixed charge coverage ratios, 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. 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 the Company’s quarterly re-evaluation of overall current macroeconomic conditions affecting its 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 of September 30, 2022 and December 31, 2021, the carrying value, excluding the current expected credit loss reserve (the “CECL Reserve”), of the Company’s loans within each risk rating category by year of origination is as follows:

	As of September 30, 2022										As of December 31, 2021
Risk Rating	2022		2021		2020		2019		Total		2021		2020		2019		Total
1	$	-	$	20,542,981	$	29,712,254	$	-	$	50,255,235	$	135,076,307	$	32,242,114	$	590,384	$	167,908,805
2		93,424,139		79,819,303		-		-		173,243,442		29,075,761		-		-		29,075,761
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	$	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.

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 September 30, 2022 and December 31, 2021:

As of September 30, 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	$	-	$	20,243,185	$	17,056,894	$	-	$	91,130,749	$	133,430,828
Floating-rate		8,943,733		97,660,654		-		31,920,426		13,263,665		45,856,241		197,644,719
	$	13,943,733	$	97,660,654	$	20,243,185	$	48,977,320	$	13,263,665	$	136,986,990	$	331,075,547

As of December 31, 2021 Real Estate Collateral Coverage
	< 1.0		1.0 - 1.25		1.25 - 1.5		1.50 - 1.75		1.75 - 2.0		> 2.0		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 an allowance for current expected credit losses 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 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. 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 considers multiple datapoints and methodologies that may include likelihood of default and expected loss given default for each individual loan, 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.

The Company evaluates its 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 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 and its affiliates have had operations for the past three fiscal years and have 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 the Company’s portfolio to the loans originated by its Sponsor, management considered it appropriate to consider the past repayment history of loans originated by the Sponsor and its affiliates 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, the Company forecasts losses considering a variety of factors. In considering the potential current expected credit loss, the Manager primarily considers 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, rate 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 the Company’s 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. The Manager utilizes a third-party valuation appraiser to assist with the Company’s valuation process primarily using comparable transactions to estimate enterprise value of its 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 September 30, 2022, to which the Manager may apply a private company discount based on the Company’s 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.

Regarding real estate collateral, the Company generally cannot take the position of mortgagee-in-possession as long as the property is used by a cannabis operator, but it can request that the court appoint a receiver to manage and operate the subject real property until the foreclosure proceedings are completed. Additionally, while the Company 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 the Company’s portfolio, the Company utilizes historical market loan loss data obtained from a third-party database for commercial real estate loans, which the Company believes is a reasonably comparable and available data set to use as an input for its type of loans. The Company believes 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, the Company reverts back to historical loss data.

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 borrower 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 nine months ended September 30, 2022 is presented in the table below. The Company had no CECL Reserve as of and for the period March 30, 2021 (inception) to September 30, 2021.

	Outstanding⁽¹⁾		Unfunded⁽²⁾		Total
Balance at December 31, 2021	$	134,542	$	13,407	$	147,949
Provision for current expected credit losses		1,363,391		40,501		1,403,892
Write-off charged		-		-		-
Recoveries		-		-		-
Balance at September 30, 2022	$	1,497,933	$	53,908	$	1,551,841

(1)	As of September 30, 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 September 30, 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.

	Outstanding		Unfunded
Balance at December 31, 2021	$	134,542	$	13,407
Provision for current expected credit losses		48,296		3,047
Balance at March 31, 2022		182,838		16,454
Provision for current expected credit losses		1,020,586		25,079
Balance at June 30, 2022		1,203,424		41,533
Provision for current expected credit losses		294,509		12,375
Balance at September 30, 2022	$	1,497,933	$	53,908

The Company has made an accounting policy election to exclude accrued interest receivable, ($727,279 as of September 30, 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 accrual of 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 September 30, 2022, there were no loans with principal or interest greater than 30 days past due.