Business context and reporting period
AFC Gamma, Inc. (AFCG) filed this unaudited Form 10-Q for the quarter ended March 31, 2021. The company originates and invests in senior secured loans to cannabis operators in states where cannabis is legal; it is externally managed and intends to qualify as a REIT. AFCG began operations in July 2020 and completed its IPO in March 2021, so management says there is no comparable prior-year quarter and that early results may not indicate future performance.
Financial and operating highlights
- Revenue and earnings: Interest income and total revenue were $4.69 million. Net income was $1.40 million; basic and diluted EPS were $0.20 and $0.19, respectively. Expenses totaled $3.07 million, including $1.60 million of stock-based compensation and $876,662 of net management and incentive fees. The quarter included a $66,100 credit-loss provision benefit and a $144,402 unrealized loss on fair-value loans.
- Supplemental earnings: Non-GAAP distributable earnings were $3.21 million, or $0.45 per weighted-average share, versus GAAP net income of $1.40 million. The reconciliation adds back non-cash compensation, unrealized losses, and the credit-loss provision. The measure is not GAAP and may not be comparable with peers.
- Balance sheet and liquidity: At March 31, total assets were $221.5 million, including $126.8 million of cash and cash equivalents. Total liabilities were $5.17 million and stockholders’ equity was $216.3 million. Cash rose from $9.6 million at year-end, primarily following IPO proceeds. The company reported no revolving-facility borrowings at quarter-end.
- Cash flow: Operating activities provided $2.37 million; investing activities used $6.89 million; financing activities provided $121.68 million. Financing inflows included IPO proceeds, net of offering costs, and were partly offset by $2.22 million of dividends paid.
- Loans and credit: Management’s portfolio schedule reported approximately $131.4 million of commitments and $98.4 million of outstanding principal at quarter-end. Four loans were carried at fair value ($50.3 million fair value); loans carried at cost were $39.2 million, with a separate loan receivable of $3.24 million. The total CECL reserve was $531,497, including $248,317 against outstanding loan balances and $283,180 for unfunded commitments.
- Dividends and book value: The company paid a $0.36-per-share first-quarter dividend. Book value per share was approximately $16.18, compared with $14.83 at December 31, 2020.
Material changes versus the prior period
- The March IPO and over-allotment raised approximately $136.6 million gross and $123.9 million net, increasing shares outstanding from 6.18 million at year-end to 13.37 million at March 31.
- Loans carried at cost increased from $31.8 million to $39.2 million; their outstanding principal rose from $33.9 million to $42.9 million. Fair-value loan balances increased from $48.6 million to $50.3 million.
- Undrawn loan commitments increased to $33.47 million from $19.83 million. The reported CECL reserve increased to $531,497 from $465,397, largely reflecting a larger reserve for unfunded commitments.
Outlook, commentary, and risks
- Management intends to deploy IPO proceeds into existing unfunded commitments, new cannabis-industry loans, and general corporate purposes. It expects to seek additional equity and/or debt as the portfolio grows. The filing identifies projected second-quarter distributable earnings as a forward-looking topic but does not provide a clear numerical forecast in the supplied text.
- Subsequent to quarter-end, AFCG reported three loan closings with $50 million of commitments and $42.3 million funded, plus approximately $12.1 million of loan repayments. A subsidiary of Public Company C repaid its loan in April, generating a $750,000 exit fee and a $750,000 prepayment premium.
- In May, the affiliate-provided revolving credit commitment was increased from $40 million to $50 million, its rate reduced from 8% to 6%, and its maturity extended to the earlier of December 31, 2021 or a qualifying refinancing. The facility remained undrawn as of the report date.
- AFCG disclosed January 2021 forbearance and loan modifications for Public Company A following payment, lien, and restructuring-related defaults. The borrower later made the January payments; management cautioned it may have difficulty meeting future obligations. The filing says no other borrowers were in default.
- Key risks include cannabis remaining illegal under U.S. federal law, changes in state cannabis laws, borrower credit and collateral risk, portfolio concentration, illiquid Level 3 loan valuations, COVID-19 uncertainty, interest-rate mismatches, and the transition away from LIBOR. Management noted that all borrowers were permitted to operate during the pandemic, but its ultimate impact remains uncertain.
- The company intends to qualify as a REIT and generally expects to distribute at least 90% of REIT taxable income. The Board declared a $0.38-per-share second-quarter dividend in May; the filing cautions that declared dividends do not establish future dividend capacity. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Review Public Company A’s repayment capacity and the status and terms of its modified loans and forbearance arrangements.
- Assess borrower concentration, collateral valuations and coverage, and the sensitivity of Level 3 fair values to market yields; these valuations may differ materially from realizable proceeds.
- Track deployment of IPO proceeds, funding obligations, and the company’s liquidity and refinancing needs as the short-dated revolving facility approaches maturity.
- Compare GAAP earnings and cash receipts with non-GAAP distributable earnings, particularly given PIK interest, original-issue-discount accretion, and stock-based compensation.
- Confirm the timing and terms of post-quarter loan activity and dividends. The MD&A contains a conflicting over-allotment completion date of May 26, while the financial statements and other filing sections state March 26, 2021.