AFC Gamma Inc

NASDAQ:AFCG

Earnings Call Transcript 2023-Q2

[Operator]

Hello. Good day everyone and thank you for standing by. Welcome to the AFC Gamma Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today Gabriel Katz, Chief Legal Officer.

[Gabriel Katz, Chief Legal Officer]

Good morning and thank you all for joining AFC Gamma's earnings call for the quarter ended June 30, 2023. I'm joined this morning by Leonard Tannenbaum, our Chief Executive Officer; Brandon Hetzel, our Chief Financial Officer; and Robyn Tannenbaum, our President.

Before we begin, I would like to note that this call is being recorded. Replay information is included in our July 24, 2023 press release and is posted on the Investor Relations section of AFC Gamma's website at afcgamma.com along with our second quarter earnings release and investor presentation.

Today's conference call includes forward-looking statements and projections that reflect the company's current views with respect to among other things future market developments, anticipated portfolio yield and financial performance, and projections in 2023 and beyond. These statements are subject to inherent uncertainties in predicting future results and conditions.

Please refer to AFC Gamma's most recent periodic filings with the SEC for certain significant factors that could cause actual results to differ materially from these forward-looking statements and projections.

During this call, we will refer to distributable earnings, which is a non-GAAP financial measure. Reconciliations of net income the most comparable GAAP measure to distributable earnings can be found in both AFC Gamma's earnings release and investor presentation available on AFC Gamma's website.

The format for today's call is as follows; Len will provide introductory remarks and overview of our second quarter performance and strategic commentary. Brandon will summarize our financial results and we will then open the line for Q&A.

With that, I will now turn the call over to our Chief Executive Officer, Leonard Tannenbaum.

[Leonard Tannenbaum, Chief Executive Officer]

Thank you, Gabe. Good morning and welcome to AFC Gamma's earnings call for the quarter ended June 30th, 2023. I would like to thank everyone for joining us today to discuss our results.

Turning to the quarterly results. For the second quarter of 2023, AFC Gamma generated distributable earnings of $0.49 per basic weighted average share of common stock. As a reminder, distributable earnings is the primary metric that the Board considers when declaring AFC Gamma's quarterly dividend. The Board of Directors declared a $0.48 dividend per share for the June quarter.

Since going public, we have just generated distributable earnings that have met or exceeded our dividends in each quarter and paid out $4.58 in dividends per share. Since mid-2022 given the market and interest rate volatility AFC Gamma has taken a conservative view to deploying capital. We have raised the bar on originations and maintained ample cash on our balance sheet to capitalize on opportunities that may arise.

As we stated last quarter, we continue to see an uptick in acquisition activity in the cannabis market both from existing operators buying distressed assets as well as new investors coming into the market to purchase assets with a significant discount.

The capital formation around these assets is promising. We continue to believe that there are investable states in Canada including Missouri, Georgia, Maryland, Arizona, and Ohio to name a few.

Subsequent to quarter end, we funded a new cannabis investment to private company M of approximately $25 million into one of the newly formed well-capitalized operators that we believe will continue to consolidate valuable assets in key limited license states. We continue to have liquidity to make additional debt investments in operators in limited license states that we believe have strong risk-adjusted profiles.

Turning to our current portfolio. We have made substantial progress in reducing our exposure to underperforming assets and continue to actively portfolio manage them. We believe that, our focus on targeting operators in limited license states has set us up to mitigate certain risks.

During the June quarter and subsequent to quarter end, we have been active in monetizing collateral to reduce exposure to these underperforming credits. We've released select -- we've received select principal prepayments and/or sold at par $43.4 million of debt in these credits, which I will now describe in further detail.

In May of 2023, we placed private company I which was rated a category four loan under our CECL analysis in foreclosure. We sold two-thirds of the credit facility to a multistate operator at par plus accrued interest and have a put rate on remaining one-third immediately prior to the transfer of one of the borrowers' cannabis licenses. The multistate operator is now leading the foreclosure process and we expect that we will have a full recovery on the remaining one-third of our debt outstanding. This asset remains rated as category four loan under our CECL analysis.

Additionally, during the quarter and subsequent to quarter end AFC Gamma and its syndicate group received a paydown of approximately $45.9 million of private company A's credit facility from the borrower sale of its Maryland and Arizona assets. This is another example of AFC Gamma's active portfolio management approach to de-risk underperforming assets.

Lastly, we were a small co-lender as part of the larger credit facility to a subsidiary of private company each. During the quarter, we successfully exited the loan as it matured and we did not participate in the refinancing. We received a repayment of all principal accrued interest and exit fees.

As we have discussed during the last several quarters, private company G which we were closely monitoring continues to have cash flow challenges. While private company G which pays interest and arrears paid its full monthly interest remaining cash they did not pay any interest for the month of June and are now 30 days past due. Additionally, during July, they made the decision to lay off their management team including the CEO and CFO.

While we continue to engage with private company G's restructuring team, we have put them on nonaccrual for the month of June. We remain excited however about their near-term prospects in New Jersey, and look forward to the full optimization of their cultivation facility in September. We may need to inject additional capital to the specific project to complete the full build-out in New Jersey.

In order to reduce our exposure to this underperforming asset, we've initiated a consensual foreclosing proceeding with respect to the borrowers' three Pennsylvania dispensaries. We expect that the net cash proceeds of the public auction will be used to prepay a portion of the principal outstanding under our credit facility.

All interested parties should contact PPL Group to participate in the UCC Article nine foreclosure auction which is scheduled for September 6. Additionally, private company G has told us that they intend to sell certain noncore noncollateral assets to contribute towards interest payments and its expansion of its New Jersey operations.

As we have said in past calls, we believe there are incredible newer cannabis operators entering the market that are well capitalized to take advantage of current market environment and we are pleased to begin investing in this next phase of the cannabis industry.

As you may have seen in today's Wall Street Journal in the article titled, new lending by mortgage REITs has dried up very informative article. The opportunity in non-cannabis real estate is -- continues to grow, and centers around the regional banks and mortgage REITs limiting the amount of capital they are lending on a loan-to-cost basis.

As a result this creates an opportunity for alternative lenders like us to fill that void. We continue to see interesting deals in commercial real estate and have formed a strong pipeline of these opportunities and are working through several deals in the complete stage.

With that, I'll turn over the call to Brandon to review our financial results.

[Brandon Hetzel, Chief Financial Officer]

Thank you, Len. For the quarter ended, June 30, 2023, we had GAAP net income of $12.1 million or earnings of $0.59 per basic weighted average common share and generated net interest income of $16.1 million and distributable earnings of $9.9 million or $0.49 per basic weighted average common share.

As previously mentioned, we believe providing distributable earnings is helpful to shareholders in assessing the overall performance of ASC Gamma's business. Distributable earnings represents the net income computed in accordance with GAAP, excluding non-cash items such as stock compensation expense, any unrealized gains or losses, provisions for current expected credit loss also known as CECL, taxable REIT subsidiary income or loss, net of dividends and other non-cash items recorded in net income or loss for the period.

We ended the second quarter of 2023 with $397.1 million of principal outstanding spread across 11 borrowers. Subsequent to June 30, 2023, we funded $25 million to private company M. As of August 4, 2023, AFC Gamma's portfolio consisted of $437.5 million of current commitment with $425.7 million funded across 12 borrowers.

As of June 30, 2023, the CECL reserve represented approximately 4.7% of our loans at carrying value compared to 5.4% at March 31, 2023. The decrease in the reserve was mainly driven by the sale of two-thirds of the loan to private company I during the quarter. The weighted average portfolio yield to maturity, which is measured for each loan over the life of special loan was approximately 21% as of June 30, 2023 and 20% as of August 4, 2023.

Next, let's take a look at our balance sheet, which remains strong. As of June 30, 2023, we had total assets of $454 million and cash and cash equivalents of $82.1 million. Additionally, we had zero drawn on our line of credit, which provides us up to $60 million in available funds to be drawn as needed.

Currently the majority of our cash is earning approximately 4.3% to 5.4%. As of June 30, 2023 our total shareholders' equity was $340.3 million and our book value per share was $16.64.

On July 14, 2023, AFC Gamma paid a dividend of $0.48 per common share for the second quarter to shareholders of record as of June 30, 2023. Year-to-date we have paid out dividends of approximately 99% of our distributable earnings. As a reminder, on an annual basis our dividend policy is to pay between 85% and 100% of distributable earnings over the year.

With that, I will now turn it back over to the operator to start the Q&A. Operator?

[Leonard Tannenbaum, Chief Executive Officer]

Thank you so much. Thanks everyone for attending the call. We look forward to reporting to you next quarter.

[Operator]

And with that, we thank you for participating in today's program. You may now disconnect.