Description

     Back on 5/8/22, dakota recommended SSIC at $8.85. The stock is up about $1.00 in price and investors have received $1.58 of cash distributions...a nice return. dakota has kept us up to date with a note on a corporate transaction between SSIC and Chicago Atlantic Real Estate Finance, Inc (REFI) that was announced on 2/20/24. I think that the proposed transactions between SSIC and REFI will benefit the holders of SSIC stock and sets up a nice transaction for a respectable rate of return. Thank you dakota!

     SSIC is a BDC started in by Wall Street veterans to finance businesses in the cannabis trade. It was organized in early 2021 and went public in early 2022. The principals of the company are in their 50's and 60's. They had all been employed by upper-tier Wall Street firms. The independent directors of SSIC have similar credentials. In addition, the outside directors only received fees of ~$25,000 each last year. There is no rip-off here. Book value of the company was $13.77 on 12/31/23. Of that, ~38% was cash ($32.6mm) with 6 investments of $54.1mm comprising the other 66% of assets. There is no indebtedness. SSIC has ~6,215,000 shares outstanding. Of those, management owns ~4,520,000 or ~73% worth ~$63.5mm. At ~$10.00 a share the company has $5.47 of cash per share and a loan book of $8.57 share which, ex-cash, is valued at $4.53 or ~53% of face. The loan book is performing and has a weighted average YTM of 18.2%.

     It is generally the case with BDCs that management does not own a lot of stock, unlike the case with SSIC. A BDC is a vehicle that is designed to produce fee income with as little investment as possible. It is also designed to use leverage so that fee income is high relative to equity. While the management company of SSIC does have a standard BDC fee structure, management has been unable to invest beginning capital no less employ leverage to increase fees. I do not know why this is so. Perhaps, the SSIC management is uncomfortable in the role of principal versus agent, or, perhaps, they are just worried about their ~$63.5mm of investment in SSIC. Whatever the reason, management has not made the most of the SSIC vehicle.

     Chicago Atlantic management company has offered to acquire the management company of SSIC. It has also offered to swap 24 loans with a value of $130mm for SSIC stock at NAV ($13.77 a share on 12/31/23). Chicago Atlantic will also use its bet efforts to add an additional 4 loans with a value of $43mm to the swap package. If the transaction takes place, Chicago Atlantic will own a majority of SSIC shares. The package of loans in the swap has a 19.1% weighted average YTM - a modest uptick from SSIC's current portfolio. In addition, corporate expense on a per share basis should be less. The transaction is expected to be voted upon and close around mid-2024. REFI stock has a book value of $15.63 which is where it trades. The company pays a $2.17 dividend - 13.9% on book and market. If SSIC trades in a similar fashion, the shares would be worth ~$13.75, a 40% return. A 12% return on book would generate a $1.65 dividend, a 16.9% yield. If the deal does not happen, you own SSIC at ~70% of book and get a 10% yield. 

     Chicago Atlantic has been very successful in putting money to work in the cannabis space. They started the business in 2019 raising capital in private vehicles. In 12/21 they split off some of the assets from these vehicles to form Chicago Atlantic Real Estate Finance, Inc (REFI)...a REIT. Note that SSIC is a BDC while REFI is a REIT. BDCs can invest in a great many asset types while REITs are restricted, in the main, to assets backed by real estate. The cannabis industry is large and uses many types of assets, not all of them real estate related. SSIC is a very clean, publicly listed BDC in the cannabis space that has unused financial capacity. I believe that this is a reason for the deal. As of 9/30/23, REFI had ~$338mm of loans outstanding and ~$63mm drawn on its revolver.

     Chicago Atlantic was started, and is controlled, by 3 graduates of the University of Chicago Booth School of Business. John Mazarakis, Chairman, is 44 years old, owns 1mm sq. feet of real estate and started a restaurant chain that has 30 locations and 1,200 employees. Tony Cappell, CEO, is 37 years old, worked for Wells Fargo Foothill and Stonegate Capital. Dr. John Bodmeier, Co-President, is 33 years old, has a PHD in Fiance from Booth in addition to an MBA, and was a Senior Advisor to the US Department of Health and Human Services. The team has made more than $2B of cannabis loans. A friend of mine is in the cannabis business. He knows the Chicago Atlantic and speaks well of them.

     All-in-all, this transaction seems to offer a good rate of return.

     RISK

     The deal doesn't close.

Catalyst

Deal closing.