Advanced Flower Capital Inc. (AFC Gamma, Inc.) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The filing identifies the registrant as AFC Gamma, Inc. It is an externally managed lender primarily to state-legal cannabis businesses, with a stated expansion into certain non-cannabis investments.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest income | $19.8 million | $10.6 million | $60.1 million | $24.1 million |
| Net interest income | $18.1 million | $10.6 million | $55.0 million | $24.1 million |
| Net income | $11.5 million | $7.9 million | $33.0 million | $14.0 million |
| Diluted EPS | $0.57 | $0.47 | $1.67 | $1.10 |
| Distributable earnings per basic share (non-GAAP) | $0.59 | $0.44 | $1.89 | $1.30 |
Q3 interest expense was $1.6 million; nine-month expense was $5.1 million, largely reflecting the 5.75% 2027 Senior Notes issued in November 2021. The filing does not provide a clear margin percentage.
- Portfolio and credit: At September 30, loans held at fair value were $94.1 million; loans held at carrying value were $339.2 million; and a loan receivable was $2.2 million. CECL reserves, including unfunded commitments, totaled $6.2 million, or 1.80% of relevant loan balances, compared with $3.1 million, or 1.20%, at year-end 2021. No loans were rated highest-risk category 5; $33.4 million were rated category 4.
- Cash flow: Nine-month operating cash flow was $27.5 million, investing cash outflow $68.5 million, and financing cash outflow $31.9 million. Cash declined to $36.3 million from $109.2 million at December 31, 2021. Operating cash flow was below the $30.2 million of dividends paid.
- Debt and liquidity: Total liabilities were $123.9 million. Senior notes payable, net, were $97.0 million (the notes have $100 million principal, mature in May 2027, and bear 5.75% interest). The $60 million secured revolver was undrawn at quarter-end; it matures in April 2025 and may increase to $100 million subject to conditions. Management stated cash, available facility capacity, and operating cash flows should meet requirements for at least 12 months.
- Equity and distributions: Shareholders’ equity was $347.4 million; book value per share was approximately $17.06, versus $16.61 at year-end 2021. The company declared a $0.56-per-share Q3 dividend, paid October 14, 2022; nine-month dividends declared were $1.67 per share.
Material changes versus comparable periods
- Net income rose to $11.5 million in Q3 from $7.9 million, and to $33.0 million for nine months from $14.0 million. Management attributed higher interest income mainly to increased average principal outstanding as the loan portfolio expanded.
- Loans held at carrying value increased to $339.2 million from $257.2 million at year-end 2021; outstanding principal rose to $349.3 million from $270.8 million. Nine-month new fundings on these loans were approximately $139.6 million.
- Provision for expected credit losses increased to $3.0 million for nine months from $1.4 million in the prior-year period. Management cited macroeconomic factors, portfolio changes, and other model inputs.
- Common shares outstanding increased to 20.364 million from 16.443 million at year-end 2021, including January public offering and ATM sales. Nine-month net proceeds from common stock sales were approximately $75.1 million.
- The company sold its $15.9 million available-for-sale debt security in March 2022, recording an approximately $0.2 million realized loss; no debt securities remained at September 30.
Outlook, commentary, risks, and unusual items
No specific earnings or dividend guidance was provided. Management said it expects demand for cannabis-sector financing and its loan originations to grow, and expects to need additional equity and/or debt capital in the near future. It also described an expanded strategy that includes first-lien loans to non-cannabis businesses, non-cannabis real estate, and mortgage-backed securities.
- After quarter-end, Public Company F repaid $86.6 million of principal in full; AFC Gamma received approximately $0.1 million in prepayment premium and $0.6 million in make-whole premium. The repayment reduces a major borrower exposure but also removes loan income.
- After quarter-end, the company increased its commitment to one borrower by $30.0 million, reduced another borrower commitment by $19.5 million, and funded approximately $9.2 million. An October amendment added $30.0 million of AFC Gamma commitment to a facility, with $7.8 million funded, and changed pricing to Prime plus 5.8%, subject to a 5.5% floor. In November, a separate borrower facility commitment was reduced from $82.5 million to $63.0 million.
- Credit risks include cannabis’ continuing federal illegality, licensing and regulatory risks, borrower defaults, illiquid collateral and restrictions on taking possession of cannabis-related assets. The top four borrowers represented approximately 63.6% of outstanding principal at quarter-end; real estate collateral coverage averaged approximately 1.0 times committed principal.
- Three fair-value loans totaling $94.1 million use Level 3 inputs. Management cautions that estimated values may differ materially from realizable values; a 50-basis-point market-yield increase was estimated to reduce unrealized value by approximately $0.5 million.
- Interest-rate sensitivity: management estimated that a 100-basis-point increase or decrease in floating benchmarks would change annual interest income by approximately $1.4 million in either direction. Changes in funding costs, benchmark transitions, and mismatches between fixed- and floating-rate assets and liabilities could affect earnings.
- Related-party management and incentive fees were $4.7 million in Q3 and $14.7 million for nine months. The filing reports no material legal proceedings and no material subsequent events other than those described.
Most important facts for investors to verify
- Whether borrower repayment and subsequent commitment changes materially affect portfolio concentration, recurring interest income, and liquidity.
- Borrower performance, collateral values, and the continued adequacy of the $6.2 million CECL reserve amid higher macroeconomic and credit risks.
- Cash available after dividends and loan funding obligations, including $56.2 million of unfunded loan commitments and the undrawn revolver’s borrowing-base and covenant conditions.
- Whether the $0.56 quarterly dividend is supported by cash collections: nine-month operating cash flow was below dividends paid, and reported earnings include OID and payment-in-kind income.
- Potential dilution and related-party costs from further equity issuance, incentive fees, and the expanded investment mandate.