Advanced Flower Capital Inc. (AFC Gamma) — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. AFC Gamma is an externally managed commercial real estate lender specializing in loans to cannabis operators, with an expanded CRE strategy. Results are unaudited and consolidated, including its subsidiaries.
Financial results and position
| Metric | Q1 2024 | Q1 2023 or prior period |
|---|---|---|
| Interest income | $16.36 million | $18.50 million |
| Net interest income | $14.76 million | $16.83 million |
| Net income (loss) | $(0.05) million; $(0.01) per diluted share | $10.03 million; $0.49 per diluted share |
| Distributable earnings, non-GAAP | $9.97 million; $0.49 per basic share | $11.62 million; $0.57 per basic share |
| Net cash from operations | $6.37 million | $4.38 million |
| Cash and cash equivalents | $82.30 million | $121.63 million at Dec. 31, 2023 |
| Total assets / shareholders’ equity | $476.41 million / $310.62 million | $466.59 million / $320.05 million at Dec. 31, 2023 |
| Debt | $60.0 million revolver; $90.0 million senior notes principal | $42.0 million revolver at Dec. 31, 2023 |
| Book value per share | $15.03 | $15.64 at Dec. 31, 2023 |
Operating cash flow was below the $9.82 million of dividends paid during the quarter. Investing activities used $53.88 million, primarily reflecting loan funding; financing activities provided $8.18 million. Cash fell by $39.33 million. The $60 million revolving facility was fully drawn at quarter-end, with no borrowing availability; it matures April 29, 2025. Management said cash, operating cash flows and available financing were expected to meet operating needs and service debt for at least 12 months.
Portfolio, credit and material changes
- Loans held at carrying value totaled $357.85 million across 12 loans, up from $301.27 million across nine loans at year-end. Outstanding principal was $370.55 million. The portfolio also included two fair-value loans with $68.63 million principal and $54.98 million fair value.
- The CECL reserve on carrying-value loans and a loan receivable rose to $31.36 million, or 8.71% of the related balances, from $26.42 million at year-end. The quarter’s credit-loss provision was $4.93 million, versus $0.70 million in Q1 2023.
- Three loans were on nonaccrual at quarter-end: Private Company A ($49.7 million principal, fair-value loan), Subsidiary of Private Company G ($79.2 million), and Private Company K ($13.4 million). A separate $2.0 million loan receivable was also on nonaccrual. Private Company I, previously on nonaccrual, repaid about $3.8 million principal and $0.7 million past-due cash interest in March.
- Fair-value loans recorded a $3.61 million unrealized loss. One fair-value borrower was in default and receivership; another loan had passed maturity without repayment and was in receivership.
- Top four borrowers represented 58.3% of aggregate portfolio principal. About 51% of portfolio principal was floating-rate at March 31; management estimated a 100-basis-point benchmark-rate increase would add about $2.3 million to annual interest income, while a decrease would reduce it by about $1.9 million.
Outlook, contingencies and unusual items
- No formal earnings or origination guidance was provided. Management cited lending opportunities in CRE amid constrained financing and in cannabis, while noting the need for additional equity and/or debt funding to support expected investment growth.
- AFC Gamma announced a planned spin-off of Sunrise Realty Trust (SUNS), its CRE portfolio, into a separate publicly traded REIT. The companies expected approximately $115 million of assets, in loans and cash, to be contributed to or held by SUNS. Completion and timing remain uncertain. AFC Gamma incurred about $0.5 million of spin-off costs in Q1; after the spin-off, it plans to focus on cannabis lending.
- In April, Subsidiary of Public Company H received a reservation-of-rights notice citing defaults, including a minimum-cash covenant breach as of March 31, and then missed an interest payment due May 1. Lenders were evaluating remedies. This borrower had $84 million principal outstanding, about 19% of portfolio principal.
- In April, Private Company L prepaid approximately $8.1 million following collateral sales and paid a $0.2 million prepayment premium.
- The common dividend declared for Q1 was reduced to $0.48 per share from $0.56 a year earlier. The company reported no material legal proceedings and said disclosure controls were effective. Cannabis-related credit risks include federal illegality, licensing and regulatory changes, illiquid collateral and limits on taking possession of cannabis assets. Fair values rely on Level 3 assumptions and may differ materially from realized recoveries.
Important facts for investors to verify
- Current status, recovery prospects and subsequent payment performance of the nonaccrual loans, especially Private Company A, G and K.
- Developments in the Public Company H defaults and potential impact on the $84 million exposure and CECL reserve.
- Whether operating cash generation and collections can sustain the dividend, given Q1 operating cash flow was below dividends and the revolver was fully drawn.
- Spin-off timing, final assets and liabilities transferred, separation costs, and the effect of SUNS ceasing to guarantee the 2027 notes.
- Underlying assumptions for the CECL allowance and Level 3 fair values, and whether reported estimates translate into cash recoveries.