Advanced Flower Capital Inc. (AFC Gamma, Inc.) — FY 2022 Form 10-K
Business context and reporting period. The filing is AFC Gamma, Inc.’s annual report for the year ended December 31, 2022; it does not provide a clear standalone Q4 income statement or other Q4-only performance figures. AFC Gamma is an externally managed commercial real estate lender, historically focused on senior secured loans to state-compliant cannabis operators. In 2022 it expanded its investment guidelines to include non-cannabis commercial real estate loans, real property and mortgage-backed securities. The company has elected REIT tax treatment.
Key financial metrics
| Metric | FY 2022 / Dec. 31, 2022 | Comparable period / change |
|---|---|---|
| Interest income | $81.5 million | $38.1 million in 2021; up 113.7% |
| Net interest income | $74.7 million | $37.0 million in 2021 |
| Net income | $35.9 million; $1.80 basic EPS | $21.0 million; $1.57 basic EPS in 2021 |
| Distributable Earnings (non-GAAP) | $49.9 million; $2.51 per basic weighted-average share | $24.7 million; $1.85 per share in 2021 |
| Operating cash flow | $31.3 million | $9.5 million in 2021 |
| Cash dividends | $2.23 per common share declared for 2022 | $1.67 per share for 2021; 2022 cash paid was $41.6 million |
| Assets / equity | $519.2 million / $339.1 million | At Dec. 31, 2022 |
| Cash and cash equivalents | $140.4 million | $109.2 million at Dec. 31, 2021 |
| Debt | Approximately $160.0 million consolidated indebtedness, excluding issuance costs and accrued interest | Includes $100 million 5.75% senior notes due 2027 and $60 million revolver borrowings at year-end; the revolver was repaid Jan. 3, 2023 |
The filing does not present a conventional operating margin. Net interest income was $74.7 million; total expenses were $23.4 million, and the provision for expected credit losses was $11.2 million. Interest expense rose to $6.8 million from $1.1 million in 2021. The company states that year-end cash, revolver capacity and expected operating cash flows were sufficient for the next 12 months.
Portfolio, liquidity and material changes
- At year-end, the portfolio comprised loans to 12 borrowers, with approximately $401.2 million in outstanding principal and $45.6 million of unfunded commitments. Total loan commitments were $447.1 million.
- Estimated weighted-average portfolio yield-to-maturity was approximately 21%; this estimate relies on management assumptions and is not a forecast or assurance of future returns.
- The expected-credit-loss reserve on loans at carrying value and loan receivables rose to $14.3 million, or 4.97% of the relevant balance, from $3.1 million, or 1.20%, in 2021. The filing attributes the increase to macroeconomic factors, portfolio changes and other estimation inputs.
- Top four borrowers represented about 70.8% of outstanding principal. The largest facility represented about 18.7% of portfolio principal and 20.1% of commitments.
- Net cash provided by operations of $31.3 million was below the $41.6 million of dividends paid during 2022. Management notes that earned original issue discount and PIK-related repayment timing affected this comparison.
- Common equity issuance generated approximately $73.3 million net proceeds in 2022, including an underwritten offering and ATM sales. The company also established a $60 million secured revolving facility, potentially expandable to $100 million subject to conditions.
- Management reported approximately $3.6 million of net unrealized losses on loans held at fair value, compared with approximately $0.6 million of net unrealized gains in 2021.
Outlook, commentary and risks
- No formal earnings or dividend guidance is provided. Management describes financing opportunities in commercial real estate amid higher rates and constrained lender capital, while continuing to pursue cannabis lending. As of March 1, 2023, the prospective pipeline was approximately $454 million for commercial real estate and $245 million for cannabis loans; these opportunities were not committed and may not close.
- Credit stress is evident in Public Company A loans: the company placed its participations on nonaccrual beginning October 1, 2022 after payment defaults; the borrower’s Canadian parent and affiliates entered restructuring proceedings in Canada. AFC Gamma recorded a $1.2 million unrealized loss on the real estate loan and a $1.1 million expected-credit-loss reserve on the equipment loan. The filing also identifies a separate $2.2 million loan receivable on nonaccrual, with an approximately $1.1 million reserve.
- Other borrower amendments included covenant waivers, deferred principal and partial PIK interest arrangements. Subsequent to year-end, Private Company B received a forbearance and modification, and Private Company I was granted principal-payment deferrals. Private Company K’s commitment was reduced from approximately $25.2 million to $14.5 million in February 2023.
- Key risks include cannabis remaining illegal under U.S. federal law; restricted or delayed remedies on cannabis collateral; borrower defaults and concentration; illiquid loans and subjective Level 3 valuations; interest-rate, funding and benchmark-transition risk; and the ability to maintain REIT status and the Investment Company Act exemption.
- The business is externally managed, with material related-party fees and co-investments. Manager compensation and reimbursable expenses totaled approximately $19.7 million in 2022, versus $10.6 million in 2021. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Investor verification priorities
- Review current payment status, collateral coverage, reserve adequacy and recovery prospects for Public Company A and the nonaccrual loan receivable, including developments after the filing date.
- Assess the effect of borrower concentration and the increase in expected-credit-loss reserves on earnings, book value and future distributions.
- Reconcile distributable earnings and declared dividends with cash generation: 2022 operating cash flow was below dividends paid, and Distributable Earnings is a non-GAAP measure.
- Confirm the revolver’s repayment and availability after January 3, 2023, covenant headroom, and the cost and maturity profile of the 2027 Senior Notes.
- Evaluate the assumptions behind the estimated 21% portfolio yield and Level 3 loan valuations, as well as the execution and funding needs of the expanded CRE strategy.
- Monitor related-party management fees, co-investment allocation and conflicts of interest, and the company’s continued compliance with REIT and Investment Company Act requirements.