Business context and reporting period
AFC Gamma, Inc. (the filing registrant; the request metadata names Advanced Flower Capital Inc.) is an externally managed commercial real estate finance company focused on senior secured lending to cannabis operators in U.S. states where cannabis is legal. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021. The company began operations on July 31, 2020, so the 2020 comparison covers only about two months and is not directly comparable to a full quarter or nine months.
Financial results and condition
- Revenue and earnings: Third-quarter interest revenue was $10.6 million and net income was $7.9 million ($0.48 basic and $0.47 diluted per share). For the nine months, revenue was $24.1 million and net income was $14.0 million ($1.13 basic and $1.10 diluted per share). Approximate net income margins were 75% for the quarter and 58% for the nine months; earnings included noncash fair-value gains and PIK interest.
- Supplemental earnings: Non-GAAP distributable and adjusted distributable earnings were both $7.2 million for the quarter and $16.1 million for the nine months; adjusted distributable earnings per weighted-average share were $0.44 and $1.30, respectively. The company cautions that these measures are not GAAP and may not be comparable across REITs.
- Cash flow and liquidity: Nine-month operating cash flow was $7.6 million; investing cash outflow was $121.5 million, primarily reflecting loan originations and funding; financing cash inflow was $174.2 million, primarily equity proceeds. Cash was $70.0 million at September 30, up from $9.6 million at year-end. Management said cash, available revolving capacity and operating cash flows were expected to cover debt service over the following 12 months.
- Assets, equity and credit: Total assets were $303.9 million, liabilities $29.5 million and stockholders’ equity $274.4 million. The loan portfolio included 15 borrowers; carrying-value loans totaled $153.2 million, fair-value loans $76.3 million, and a loan receivable $2.8 million. The CECL reserve for outstanding loans and unfunded commitments was $1.84 million, or 118 basis points of the applicable loan balance.
- Debt and commitments: No revolving-facility borrowings were outstanding at September 30. Undrawn loan commitments were $53.9 million, all stated as due within one year. After quarter-end, the company issued $100 million of 5.75% senior notes due 2027, receiving approximately $97 million net, and amended its affiliate revolving facility to a $75 million commitment at 4.75%, with a 0.25% unused fee. The notes impose leverage and debt-service covenants.
- Margins and distributions: Book value per common share was approximately $16.69, compared with $14.83 at December 31, 2020. A $0.43-per-share third-quarter dividend was declared and paid October 15; 2021 dividends declared through September totaled $1.17 per share.
Material changes versus the prior period
The loan book expanded substantially as the company deployed IPO and follow-on equity proceeds: carrying-value loans rose from $31.8 million at year-end 2020 to $153.2 million, and cash rose from $9.6 million to $70.0 million. Common shares outstanding increased from 6.18 million to 16.44 million. The nine-month CECL provision was $1.37 million. Because operations began in July 2020, reported year-over-year earnings comparisons are especially limited.
Outlook, commentary, risks and unusual items
- No quantitative earnings guidance was provided. Management described a pipeline of lending opportunities and expected to seek additional debt or equity capital as the portfolio grows; future dividends remain at the Board’s discretion.
- The portfolio is concentrated in cannabis lending, where federal illegality, changing state laws, licensing, banking access, borrower performance and collateral enforcement create material risks. The company notes that it may be unable to take possession of cannabis-related collateral after a default and could instead need to sell a loan at a loss.
- One Public Company A borrower group had prior covenant and payment defaults. The company reported that January 2021 payments were subsequently made and no payment obligations to AFCG were delinquent, but warned that the borrowers may have difficulty meeting future obligations.
- Fair values for the fair-value loan portfolio rely on Level 3, unobservable inputs and may differ materially from eventual proceeds. The filing estimates that a 50-basis-point change in market yields would change unrealized gains or losses by about $0.4 million.
- Six loans were floating-rate, representing approximately 45.7% of the portfolio on the basis described in the market-risk disclosure; LIBOR transition and possible asset-liability rate mismatches could affect income and funding costs. COVID-19’s future impact remained uncertain.
- Post-quarter events included a $50 million commitment and funding to Public Company F, sale of the remaining Public Company E investment for approximately $5.1 million net, and the senior-note and revolver transactions described above. The company reported no material pending legal proceedings and effective disclosure controls.
Important facts for investors to verify
- Reconcile reported GAAP income with distributable earnings, including unrealized loan gains, PIK interest, CECL provisions and incentive fees.
- Review borrower concentration, the status and collateral support of the historically defaulting Public Company A loans, and the assumptions behind the reported 1.1-times weighted-average real estate collateral coverage.
- Confirm current funding needs and availability under the $53.9 million unfunded commitments, revolving facility and 2027 notes, as well as compliance with debt covenants.
- Assess the quality and cash collectability of interest income, including interest funded from reserves and PIK amounts, and the sustainability of the dividend relative to taxable income and cash generation.
- Check subsequent SEC filings for loan performance, updated debt and liquidity balances, LIBOR replacement terms, and developments in federal and state cannabis regulation.