Advanced Flower Capital Inc. (AFC Gamma) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The filing issuer is AFC Gamma, Inc. (Nasdaq: AFCG), an externally managed commercial real estate lender specializing in cannabis-related loans, with recently expanded lending guidelines for non-cannabis commercial real estate.
Financial results and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $17.7 million | $21.7 million | $36.2 million | $40.3 million |
| Net interest income | $16.1 million | $19.9 million | $32.9 million | $36.8 million |
| Net income | $12.1 million | $11.4 million | $22.2 million | $21.5 million |
| Basic earnings per share | $0.59 | $0.57 | $1.08 | $1.10 |
| Distributable earnings per basic share (non-GAAP) | $0.49 | $0.69 | $1.06 | $1.31 |
- Q2 interest income fell 18.4% year over year; net income rose, supported in part by a lower credit-loss provision than in Q2 2022. First-half net income increased modestly, while first-half distributable earnings declined.
- Six-month cash flow: operating activities provided $9.5 million, investing activities provided $23.0 million, and financing activities used $90.8 million. Cash decreased $58.3 million to $82.1 million.
- At June 30, total assets were $454.0 million and shareholders’ equity was $340.3 million. Loans held at fair value were $95.9 million; loans at carrying value and loan receivables, net of the CECL reserve, were $272.7 million.
- Debt included $90.0 million principal of 5.75% senior notes due 2027; the $60.0 million revolving facility was undrawn. The company repurchased $10.0 million principal of notes at 77.4% of par, recognizing a $2.0 million gain. Cash, together with revolver availability and operating cash flow, was assessed as sufficient for operating needs and debt service over the next 12 months.
- Undrawn loan commitments totaled $12.0 million. The company paid $22.9 million in dividends during the first half; the declared Q2 common dividend was reduced to $0.48 per share from $0.56 in Q2 2022. Book value per common share was approximately $16.64, versus $16.65 at year-end 2022.
Material changes, outlook and risks
- Portfolio credit deterioration is significant: two carrying-value loans were on non-accrual at quarter-end, including a roughly $79.0 million principal loan to a subsidiary of Private Company G, placed on non-accrual June 1. The borrower missed a June interest payment due July 1; AFC initiated a consensual foreclosure process. A separate approximately $3.8 million Private Company I loan was also non-accrual, with foreclosure proceedings initiated by the facility agent. The fair-value portfolio included another approximately $1.2 million non-accrual loan.
- The CECL reserve, including unfunded commitments, was $13.4 million, or 4.68% of applicable carrying-value loans and receivables, compared with $14.3 million and 4.97% at December 31, 2022. The first-half provision was a net benefit of $0.9 million, while Q2 recorded a $1.6 million provision.
- The four largest borrowers represented approximately 74.9% of portfolio principal. Management cited cannabis-sector risks, including federal illegality, licensing and regulatory uncertainty, borrower liquidity, collateral enforceability and the possibility that foreclosure proceeds will be insufficient. Loans are illiquid and valuations rely on significant unobservable inputs.
- Management reported no quantified earnings or origination guidance. It expects to pursue attractive lending opportunities in commercial real estate as well as cannabis and stated that additional equity and/or debt funding may be needed to support growth. It believes available cash, revolver capacity and operating cash flow are adequate for at least the next 12 months.
- After quarter-end, a Private Company A asset sale generated loan prepayments; approximately $27.1 million of principal and $1.0 million of exit fees were allocated to AFC Gamma, reducing its outstanding principal with that borrower to approximately $54.6 million. TRS1 also purchased a $30.0 million secured seller note for approximately $25.2 million.
- The company authorized a $20.0 million share repurchase program in June but made no repurchases during the quarter. It recorded approximately $0.7 million of first-half severance expense related to its former CFO’s departure. Management said disclosure controls were effective and there were no material changes to internal control over financial reporting.
Key facts investors should verify
- Progress and recovery prospects in the Private Company G and Private Company I defaults, including foreclosure outcomes, collateral values and future CECL changes.
- Whether the Private Company A post-quarter repayments and seller-note investment change borrower concentration, portfolio risk and cash income.
- Cash collection versus reported income, particularly PIK interest and other non-cash income, and the company’s capacity to fund commitments and dividends.
- Compliance with debt covenants, availability under the borrowing-base-limited revolver, and any future capital raises or share repurchases.
- The assumptions underlying Level 3 loan valuations and non-GAAP distributable earnings, which differ from GAAP net income.