Advanced Flower Capital Inc. (AFC Gamma, Inc.) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; filed May 10, 2022. AFC Gamma is an externally managed commercial real estate finance company focused on senior-secured lending to established cannabis businesses in U.S. states where cannabis is legal. It has elected REIT tax treatment.
Financial results and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Interest income | $18.64 million | $4.69 million |
| Interest expense | $1.70 million | None reported |
| Net interest income | $16.94 million | $4.69 million |
| Net income | $10.16 million | $1.40 million |
| Basic / diluted EPS | $0.53 / $0.52 | $0.20 / $0.19 |
| Distributable Earnings (non-GAAP) | $11.92 million; $0.62 per basic share | $3.21 million; $0.45 per basic share |
| Operating cash flow | $4.67 million | $2.37 million |
| Cash and cash equivalents at quarter-end | $63.62 million | $109.25 million at December 31, 2021 |
| Total assets / stockholders’ equity | $454.07 million / $336.51 million | $464.85 million / $273.08 million at December 31, 2021 |
At March 31, 2022, the company held $95.07 million of loans at fair value and $265.15 million of loans at carrying value, plus a $2.28 million loan receivable. Loan principal outstanding totaled approximately $373.7 million. The CECL reserve was $4.02 million, or about 1.5% of carrying-value loans and loan receivables, including a $3.39 million reserve against outstanding balances and a $0.63 million liability for unfunded commitments.
Quarter-end debt included $100 million principal of 5.75% senior notes due 2027, reported net of deferred costs at $96.66 million. The $75 million affiliate revolving balance outstanding at year-end was repaid on January 3, 2022; no balance remained at March 31. Cash decreased by $45.63 million during the quarter. Investing activities used $30.05 million, primarily for loan funding, while financing activities used $20.25 million, including the affiliate-line repayment and dividends. Unfunded loan commitments were $49.44 million.
Material changes versus the prior period
- Net income rose to $10.16 million from $1.40 million. Interest income increased about $13.9 million, primarily as the portfolio expanded; management cited principal outstanding of approximately $373.7 million at March 2022 versus $98.4 million at March 2021.
- Interest expense increased by $1.7 million, reflecting the 2027 Senior Notes and the affiliate credit facility and related financing-cost amortization.
- Total expenses increased to $6.38 million from $3.07 million. Management and incentive fees rose, including incentive fees of approximately $3.0 million versus $0.7 million.
- The CECL provision was $0.91 million versus $0.07 million. The ending reserve increased from $3.11 million at December 31, 2021 to $4.02 million.
- Common shares issued and outstanding increased to 19.74 million from 16.44 million at year-end, following a January offering that raised approximately $63.0 million net. Book value per share increased to approximately $17.04 from $16.61.
- The company declared a $0.55-per-share common dividend for the quarter, paid April 15, 2022; the comparable 2021 dividend was $0.36 per share.
Outlook, risks and notable items
- Outlook and liquidity: Management said cash on hand, borrowing capacity and operating cash flows should support business requirements and debt service for at least the next 12 months. It expects loan originations to grow and anticipates needing additional equity and/or debt financing. No quantified earnings or dividend guidance was provided.
- Subsequent financing: On April 29, 2022, the company entered a $60 million senior-secured revolving facility, potentially expandable to $100 million, maturing in 2025. It bears interest at the greater of the applicable base rate plus 0.50% or 4.50%, and has liquidity, debt-service-coverage and secured-debt covenants. The affiliate facility was terminated. The filing does not state a drawn amount under the new facility.
- Subsequent portfolio activity: After quarter-end, the company closed two loans with approximately $107.3 million of commitments and funded approximately $79.9 million of new and existing commitments. Several borrower loans were repaid or refinanced in April, including a restructured Private Company K commitment increased to approximately $24.8 million.
- Capital access: An effective shelf registration permits up to $1.0 billion of securities; a separate ATM program permits up to $75 million of common stock sales. Neither had been used as of May 9, 2022.
- Portfolio and valuation risks: The four largest borrowers represented approximately 69.4% of outstanding principal; the largest facility represented approximately 23.2%. All $95.1 million of fair-value loans were Level 3 measurements using unobservable inputs. Management warns that realized values could differ materially from estimates and that forced sales could produce lower proceeds.
- Industry and credit risks: Cannabis remains illegal under U.S. federal law, and the company may be unable to take possession of cannabis-related collateral after default. State-law changes, licensing issues, illiquid collateral, borrower credit deterioration and real-estate values could impair recovery. COVID-19 effects remained uncertain, although borrowers were permitted to operate during the quarter.
- Rates and benchmark transition: Five loans, approximately 31% of portfolio principal, were floating-rate and tied to LIBOR. Management estimated a 100-basis-point LIBOR increase would add about $0.5 million to annual interest income, subject to stated assumptions. It cautioned that borrowing costs may rise faster than asset yields and that LIBOR replacement could require contract changes.
- Unusual transactions: The quarter included a $15.9 million sale of debt securities, resulting in a realized loss of approximately $0.2 million, and a $10 million loan sale resulting in a gain of approximately $0.6 million. A borrower’s full repayment generated a reported prepayment premium of approximately $1.3 million.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls. No material subsequent events were reported beyond those described.
Important facts for investors to verify
- Review the composition, payment performance and borrower concentration of the approximately $373.7 million loan portfolio, including subsequent repayments and refinancings.
- Assess the $4.02 million CECL reserve and the judgments behind loan risk ratings, collateral values and Level 3 valuations.
- Confirm the amount drawn and borrowing-base availability under the post-quarter $60 million revolver, and monitor compliance with its covenants and the 2027 note indenture.
- Compare distributable earnings with GAAP earnings and cash collections, including the effects of PIK interest, original-issue-discount accretion and incentive fees.
- Evaluate whether cash, loan repayments and future financing can support unfunded commitments, dividends and planned portfolio growth; the filing reports $49.44 million of unfunded commitments.