AFC Gamma reports solid Q1 2024 performance By Investing.com

AFC Gamma, Inc. (NASDAQ: AFCG) reported a steady first quarter for 2024, generating distributable earnings of $0.49 per basic weighted average share of common stock. The company’s Board of Directors declared a $0.48 dividend per share, marking the fourth consecutive quarter of such a payout.

AFC Gamma showcased optimism regarding the cannabis industry’s growth prospects, citing state-by-state legalization and increasing consumer acceptance as key drivers. The lender also highlighted a robust pipeline of cannabis deals and successful portfolio management strategies during the earnings call.

Key Takeaways

• AFC Gamma reported distributable earnings of $0.49 per share.
• A $0.48 dividend was paid to shareholders of record as of March 31, 2024.
• The company remains positive about the cannabis industry’s outlook, with U.S. sales expected to reach $32 billion in 2024.
• A proposal to reclassify cannabis could significantly benefit the industry by eliminating a punitive tax regime.
• AFC Gamma is well-positioned in early-stage and near-term adult-use transition states, with a third of its portfolio exposed to Ohio, Florida, and Pennsylvania.
• The company has successfully managed its portfolio, exiting a nonaccrual loan with a 24% IRR and negotiating potential exits for underperforming loans.
• AFC Gamma’s commercial real estate portfolio spin-off into Sunrise Realty Trust is on track for completion by mid-2024.

Company Outlook

• The cannabis industry is projected to grow, with sales expected to reach $46 billion by 2028.
• AFC Gamma is optimistic about the industry’s future and its position as a leading lender.
• The anticipated reclassification of cannabis and legalization in various states could open new opportunities for the company.

Bearish Highlights

• The company reported a GAAP net loss of $0.1 million or $0.01 per share.
• Increases in the CECL reserve and unrealized losses on loans held at fair value impacted financial results.

Bullish Highlights

• AFC Gamma originated $90 million of loans during the quarter, with a strong pipeline for future deals.
• The company’s proactive portfolio management has led to successful outcomes, such as the exit of a nonaccrual loan with a 24% IRR.

Misses

• The difference between distributable earnings and the GAAP net loss was mainly due to noncash items.

Q&A Highlights

• No questions were asked during the Q&A session, indicating potential investor satisfaction or lack of concerns at the time of the call.

AFC Gamma’s first quarter performance in 2024 demonstrates the company’s ability to navigate the evolving cannabis industry landscape while maintaining a strong dividend payout for shareholders. The company’s strategic positioning in early-stage and upcoming adult-use transition states, coupled with effective portfolio management, positions it favorably for future growth. As AFC Gamma continues to capitalize on new opportunities within the cannabis sector, the upcoming spin-off of its commercial real estate portfolio is set to further streamline its operations and potentially unlock additional value for its shareholders.

InvestingPro Insights

AFC Gamma, Inc. (NASDAQ: AFCG) continues to affirm its position as a significant player in the cannabis financing space, underscored by its recent financial performance and strategic moves. Here are some insights from InvestingPro that further highlight the company’s current standing and future prospects:

InvestingPro Data indicates that AFC Gamma has a market capitalization of $254.83 million, with a Price to Earnings (P/E) Ratio of 11.99, reflecting investor sentiment about the company’s earnings capacity. The adjusted P/E Ratio for the last twelve months as of Q4 2023 stands at 12.29, which aligns with the company’s stable earnings report. Furthermore, the company boasts a robust operating income margin of 59.91%, showcasing efficient management and profitability in its core operations.

In terms of shareholder returns, AFC Gamma has a compelling Dividend Yield of 15.48% as of the first quarter of 2024, which is particularly attractive for income-focused investors. This aligns with the InvestingPro Tip that the company pays a significant dividend to shareholders, a testament to AFC Gamma’s commitment to returning value to its investors. Additionally, the company’s liquid assets surpass its short-term obligations, suggesting a solid liquidity position that can support ongoing operations and dividend payouts.

For those looking to delve deeper into AFC Gamma’s financial health and future outlook, there are additional InvestingPro Tips available, including predictions by analysts that the company will be profitable this year and has been profitable over the last twelve months. To access these insights and more, investors can visit https://www.investing.com/pro/AFCG.

For readers interested in a comprehensive analysis, using the coupon code PRONEWS24 will grant an additional 10% off a yearly or biyearly Pro and Pro+ subscription, offering a wealth of information to inform investment decisions. With several more InvestingPro Tips listed on the platform, investors can gain a nuanced understanding of AFC Gamma’s potential trajectory in the burgeoning cannabis market.

Full transcript – AFC Gamma (AFCG) Q1 2024:

Operator: Good morning, and welcome to AFC Gamma’s First Quarter 2024 Earnings Call [Operator Instructions]. As a reminder, this call is being recorded. I would now like to turn the call over to Gabriel Katz, Chief Legal Officer. Please go ahead.

Gabriel Katz: Good morning, and thank you all for joining AFC Gamma’s earnings call for the quarter ended March 31, 2024, I’m joined this morning by Daniel Neville, our Chief Executive Officer; Robyn Tannenbaum, our President; and Brandon Hetzel, our Chief Financial Officer. Before we begin, I would like to note that this call is being recorded. Replay information is included in our April 10, 2024 press release and is posted on the Investor Relations portion of AFC Gamma’s website at afcgamma.com, along with our first quarter earnings release and investor presentation. Today’s conference call includes forward-looking statements and projections that reflect the company’s current views with respect to, among other things, anticipated market developments, portfolio yield and financial performance in 2024 and beyond. These statements are subject to inherent uncertainties in predicting future results. Please refer to AFC Gamma’s most recent periodic filings with the SEC for certain conditions and significant factors that could cause actual results to differ materially from these forward-looking statements and projections. During this call, we will refer to distributable earnings, which is a non-GAAP financial measure. Reconciliations to net income, the most comparable GAAP measure can be found in AFC Gamma’s earnings release and investor presentation available on AFC Gamma’s Web site. The format for today’s call is as follows. Dan will provide an overview of our first quarter 2024 performance as well as an update on our portfolio. Robyn will then provide an update on the anticipated spinoff of our commercial real estate portfolio and Brandon will conclude with a summary of our financial results. We will then open the lines for Q&A. With that, I will now turn the call over to our CEO, Dan Neville.

Daniel Neville: Thank you, Gabe. Good morning, and welcome to AFC’s earnings call for the quarter ended March 31, 2024. I would like to thank everyone for joining us today to discuss our results. For the first quarter, AFC generated distributable earnings of $0.49 per basic weighted average share of common stock. As a reminder, distributable earnings is the primary metric the Board considers when declaring quarterly dividends. The Board of Directors declared a fourth consecutive $0.48 dividend which was paid on April 15, 2024, to shareholders of record as of March 31, 2024. Since going public, we have generated distributable earnings that met or exceeded our dividend each quarter and paid out $6.02 in dividends per share. We are increasingly optimistic about the outlook for the cannabis industry. The industry has seen expansion fueled by increasing state-by-state legalization and growing consumer acceptance. According to BDSA, the US cannabis industry is projected to continue its upward trajectory with sales hitting $32 billion in 2024 and growing to $46 billion by 2028. We continue to see exciting developments at both the state and federal level. Just last week, the Attorney General put forth a proposal to reclassify cannabis from Schedule I to Schedule III. Once enacted, this change would bring significant benefits to the US cannabis industry, including the elimination of a punitive tax regime for cannabis and increased investment in this space. From a lender’s perspective, we expect that the elimination of 280E will enhance the cash flow and credit profile for our existing borrowers and expand our pipeline of potential borrowers. Beyond the financial impact, the rescheduling process is a long overdue validation of the medical benefits of cannabis and yet another concrete step in the slow but steady march toward legalization. While there is still uncertainty related to the time line for rescheduling, we are encouraged by the progress. At the state level, Ohio is anticipated to commence adult use sales by the end of June, months ahead of schedule. We believe that Ohio will be an exciting AU transition as it currently has a strict medical program. Additionally, Florida is gearing up for a decision regarding legalizing cannabis for adult use, which will be on the upcoming November ballot. Across these two states, approximately 34 million Americans could potentially gain access to adult-use cannabis in the next few years. As the first NASDAQ-listed cannabis lender and one of the leading debt providers in this space, AFC is uniquely positioned to capitalize on these opportunities. We have created a diversified portfolio across limited license states with attractive supply-demand dynamics. As of March 1, 2024, our cannabis portfolio had a weighted average yield to maturity of 20%. We have good exposure to early-stage and expected near-term adult-use transition states. As of May 1, 2024, over 1/3 of our portfolio based on commitments, has exposure to Ohio, Florida and Pennsylvania. We are pleased to see how certain portfolio companies benefited from Missouri’s transition to adult use and believe that our portfolio is well positioned to benefit from these upcoming AU transition states as well. During the quarter, we originated $90 million of loans with $34 million of loans to cannabis operators and $56 million to commercial real estate developers. Our actionable pipeline of cannabis deals stands at $303 million, and the origination team is now firing on all cylinders. We have one additional deal in documentation that we expect to close in the coming weeks, and we continue to have liquidity to make additional investments. And given the limited supply of institutional capital, we believe this will allow us to both move up the quality curve while still achieving mid to high teens IRRs. Before turning to our portfolio, I’d like to highlight a notable transaction that we closed in the first quarter. In March, AFC funded debt of $34 million to Sunburn Cannabis, a private vertically integrated single-state operator in Florida. Sunburn represents AFC’s second transaction in Florida’s growing medical cannabis market. We are delighted to partner with the Sunburn team and believe that they exemplified the Cannabis 3.0 operators that we previously highlighted. This is a team with prior success in the Florida market that has significant experience scaling and operating cannabis businesses. We believe Sunburn is well positioned to continue to take market share in Florida, given its strong brand recognition. Now turning to the portfolio. During the quarter, we successfully exited private company eyes loan, which was on nonaccrual. As a reminder, we sold two thirds of the loan in June 2023, and in March 2024, we were repaid on the remaining $3.8 million of principal under the loan at par. The loan generated an IRR of 24% and is an example of our ability to actively manage the portfolio to achieve successful outcomes for our shareholders. Turning to Private Company B. Since entering receivership in October 2023, the company’s operations and cash generation have improved under the receivers management. To date, Company B remains current on all interest payments, including default interest, and we are negotiating potential exit opportunities. As evidenced by these two scenarios, our hands-on portfolio management efforts are yielding tangible results. We remain optimistic about achieving similar favorable outcomes for our other underperforming loans in the portfolio as we continue to make progress in reducing our exposure to these credits. Subsidiary of Private Company G continues to make progress. Since the forbearance, the borrower has infused $3 million of additional equity capital and has paid over $2 million in interest. We are also starting to see improved performance at the borrowers Pennsylvania and New Jersey operations, as a result of the experienced operators that have been put into place to manage the operations. Turning to subsidiary of Public Company H. In April 2024, the co-agents under the credit facility provided notice to the borrower, citing certain defaults including a breach of minimum cash covenants as of March 31, 2024. Additionally, in May, the borrower failed to make the April interest payments. We are currently comfortable with our collateral, but given the company’s liquidity position, we believe swift action is necessary to preserve the value of that collateral. As a reminder, our collateral package includes the business operations across 23 dispensaries and seven cultivation processors. This includes vertical operations in Ohio, New Jersey, Illinois, New York, Massachusetts, Maine and soon to be Pennsylvania, once the additional three dispensary licenses are issued. It also includes real estate assets in Connecticut, assets with own cultivation real estate in both Ohio and Illinois. We intend to take all actions necessary to protect our capital on behalf of our investors. When I joined AFC in November, I emphasize my commitment to taking a hands-on approach to address issues at select underperforming portfolio companies. We have made progress in restructuring some underperforming credits, and we remain optimistic about achieving similar favorable outcomes for our other underperforming loans. Additionally, I am pleased with our origination efforts with $90 million in deals closed during the quarter across both cannabis and commercial real estate. I look forward to continuing to update you on our progress. Now I’ll turn it over to Robyn to provide an update on the spin-off in our commercial real estate portfolio.

Robyn Tannenbaum: Thanks, Dan. The spin-off of our commercial real estate portfolio into an independent NASDAQ-listed company, Sunrise Realty Trust remains on track. We continue to expect that the spin-off will be completed by mid-2024, subject to SEC review as well as final approval by our Board of Directors. We remain excited about the opportunity set that we are seeing in commercial real estate lending, which is largely driven by a significant reduction in available capital from many of the traditional commercial real estate lending sources as regional banks have pulled back. Additionally, many of our peers are working through their existing portfolios, which has slowed new capital deployment. This trend, coupled with significant upcoming debt maturities presents us with the opportunity to construct a portfolio with new vintage assets. As of May 1, 2024, our CRE pipeline remains robust with over $815 million of potential loans, which should allow us to create a portfolio with attractive risk-adjusted returns. We plan to provide another update on the spinoff when appropriate. Now I’ll turn it over to Brandon to discuss our financials.

Brandon Hetzel: Thank you, Robyn. For the quarter ended March 31, 2024, we generated net interest income of $14.8 million and distributable earnings of $10 million or $0.49 per basic weighted average common share and had a GAAP net loss of $0.1 million or $0.01 per basic weighted average common share. The difference between our distributable earnings of $10 million and our GAAP net loss of $0.1 million is mainly driven by an increase in our unrealized losses on loans held at fair value of $3.6 million and an increase in our CECL reserve of $4.9 million for the first quarter. As previously mentioned, we believe providing distributable earnings is helpful to shareholders in assessing the overall performance of AFC’s business. Distributable earnings represents the net income computed in accordance with GAAP. Excluding noncash items such as stock compensation expense, any unrealized gains or losses, provision for current expected credit losses, also known as CECL, taxable REIT subsidiary income or loss, net of dividends and other noncash items recorded in net income or loss for the period. We ended the first quarter of 2024 with $441.2 million of principal outstanding spread across 15 loans. As of May 1, 2024, our portfolio consisted of $432.5 million of principal outstanding across 15 loans. The weighted average portfolio yield to maturity, which is measured for each loan over the life of such loan was approximately 20% as of March 31, 2024, and May 1, 2024. As of March 31, 2024, we had total assets of $476.4 million including cash and cash equivalents of $82.3 million and had $60 million drawn on our line of credit, which was subsequently repaid in full on April 1, 2024. Our line of credit provides us with up to $60 million in available funds that can be drawn as needed. Currently, the majority of our cash is earning interest of approximately 4.5% to 5.3%. As of March 31, 2024, the CECL reserve was $31.4 million or approximately 8.7% of our loans at carrying value. which increased $4.9 million from the December 31, 2023, reserve of $26.4 million. In addition to the increased CECL reserve, during the first quarter, we had an increase in our unrealized losses on loans at fair value of $3.6 million. As of March 31, 2024, our total shareholder equity was $310.6 million and our book value per share was $15.03. On April 15, 2024, AFC paid a dividend of $0.48 per common share the first quarter to shareholders of record as of March 31, 2024. Year-to-date, we paid out dividends of approximately 99% of our distributable earnings. As a reminder, on an annual basis, our dividend policy is to pay between 85% and 100% of distributable earnings over the year. With that, I will now turn it back over to the operator to start the Q&A.

Operator: [Operator Instructions] I’m not showing any questions in queue.

Gabriel Katz: Thank you all for joining us today to discuss our Q1 results.

Operator: Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.