Business context and reporting period
Advanced Flower Capital Inc. metadata identifies the company; the filing issuer is AFC Gamma, Inc. (Nasdaq: AFCG). This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021. AFC Gamma, formed in July 2020, is an externally managed commercial real estate finance company focused on senior secured lending to state-compliant cannabis operators. It completed its IPO in March 2021. Because operations began July 31, 2020, the filing says there is no prior-year comparable period for results of operations.
Financial results and position
| Metric | Three months ended June 30, 2021 | Six months ended June 30, 2021 |
|---|---|---|
| Interest income / total revenue | $8.75 million | $13.43 million |
| Net income | $4.63 million | $6.03 million |
| Basic / diluted EPS | $0.34 / $0.34 | $0.58 / $0.57 |
| Distributable earnings (non-GAAP) | $5.77 million; $0.43 per weighted-average share | $8.98 million; $0.87 per weighted-average share |
| Cash from operating activities | Not separately reported for the quarter | $7.50 million |
For the quarter, net income was approximately 53% of revenue; the six-month ratio was approximately 45%. These are calculated ratios, not company-reported margin measures. Results include management and incentive fees of $2.08 million for the quarter and $2.96 million for six months, credit-loss provision expense of $645,786 and $711,886, respectively, and unrealized losses on fair-value loans of $483,159 and $627,561, respectively. No income tax expense was reported.
At June 30, cash and cash equivalents were $124.60 million, total assets $278.51 million, total liabilities $10.05 million and stockholders’ equity $268.46 million. There were no borrowings outstanding on the $50 million revolving facility; it is provided by an affiliate of the manager, secured by substantially all company assets, bears 6% interest and matures no later than December 31, 2021 unless refinanced. Loan investments included $44.85 million at fair value and $105.40 million at carrying value, plus a $3.01 million loan receivable. The credit-loss reserve, including unfunded commitments, was $1.18 million. Undrawn loan commitments were $24.00 million. Management reported book value per common share of approximately $16.66.
Six-month cash flows included $61.68 million used in investing activities, principally loan funding, and $169.17 million provided by financing activities, principally common-stock offerings. Cash increased by $114.98 million from year-end 2020. The company paid common dividends of $0.38 per share for Q2; $0.74 per share was paid in the first half. The 125 Series A preferred shares carry a 12% cumulative dividend.
Material changes versus prior periods
- Loan principal and portfolio scale increased substantially: loans held at carrying value rose from $33.91 million to $114.38 million outstanding principal between December 31, 2020 and June 30, 2021; the fair-value portfolio’s principal declined from $50.83 million to $46.65 million.
- Common equity increased through the March IPO and June follow-on offering. The company received approximately $123.9 million and $52.6 million in net proceeds, respectively. Common shares outstanding rose from 6.18 million at year-end to 16.12 million at June 30.
- Cash grew from $9.62 million to $124.60 million. The revolving facility commitment increased from $40 million to $50 million, while its rate fell from 8% to 6% and its maturity was extended.
- There is no same-quarter prior-year earnings comparison in the filing. The company also cautions that its initial operating results are not indicative of results after its investment strategy is fully implemented.
Outlook, commentary, risks and unusual items
Management expects to deploy offering proceeds into existing unfunded commitments, new cannabis-sector loans and general corporate purposes; it also anticipates needing additional equity and/or debt to grow the loan portfolio. No quantified earnings or dividend guidance is provided. The board determines future dividends, and management cautions that recent distributions do not assure future payments. The company intends to qualify as a REIT and generally expects to distribute at least 90% of REIT taxable income.
- Credit, collateral and sector risk: Cannabis remains federally illegal in the United States. Changes in state laws, licensing or enforcement, borrower distress, and limits on taking possession of cannabis collateral could impair recovery. Loans are illiquid; several individual loans had reported real-estate collateral coverage below 1.0x, based on underwriting-time estimates.
- Valuation and credit estimates: All loans carried at fair value were Level 3, valued using significant unobservable inputs. Management says fair values may differ materially from eventual proceeds. CECL estimates depend on assumptions and economic forecasts; the reserve rose to $1.18 million from $465,397 at year-end.
- Rates and LIBOR: The company disclosed that a hypothetical 100-basis-point LIBOR rise would add about $0.1 million to annual interest income, assuming loan floors remain in place. LIBOR transition, rate mismatches and rising financing costs may affect income, valuations and distributions.
- Related parties: The manager and affiliates receive base and incentive fees, and an affiliate holds the secured revolver. In July 2021, an affiliate connected to the manager’s principal acquired part of a borrower’s credit facility and arranged additional related financing; company directors/executives also held interests in that borrower. The filing says the transactions were reviewed and approved by the Audit & Valuation Committee. The company also sold Assigned Rights to an affiliate.
- Post-quarter activity: In July, the company reported three loan closings, $27.3 million in commitments (including $19.8 million contingent) and $10.9 million funded. A borrower’s $19.75 million loan commitment was contingent on an equity raise. Another bridge loan was refinanced, with the company funding about $10.1 million of a $15.5 million facility syndicated partly to an affiliate.
- COVID-19’s full economic effect remains uncertain, although the company reported its borrowers were permitted to operate during the period. The filing reported no material pending litigation, no material changes to previously disclosed risk factors and effective disclosure controls as of June 30.
Important facts for investors to verify
- Reconcile GAAP net income with non-GAAP distributable earnings, including treatment of accrued OID and PIK interest that may not yet be cash-collected.
- Review borrower concentration, repayment performance, collateral coverage and the assumptions behind Level 3 valuations and CECL reserves.
- Assess related-party loans, Assigned Rights sales, manager fees and post-quarter transactions, including the relevant approvals and conflicts-of-interest safeguards.
- Confirm deployment of offering proceeds, funding of contingent and other unfunded commitments, and access to financing after the revolving facility’s stated maturity.
- Evaluate whether operating cash generation can support dividends and REIT distribution requirements; the filing provides no assurance that the dividend will continue at its recent level.