AFC Gamma Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 7 speakers on the call.

Operator

Good day, and welcome to the ASC Gamma Q3 2023 Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to turn the call over to Gabriel Katz, Chief Legal Officer.

Operator

You may begin.

Speaker 1

Good morning, and thank you all for joining ipseegama's earnings call for Quarter ended September 30, 2023. I am joined this morning by Leonard Tanenbaum, our Chief Executive Officer Brandon Hetzel, our Chief Financial Officer and Robin Tanenbaum, our President, before we begin, I would like to note that this call is being recorded. Replay information is included in our October 2018 2023 press release and is posted on the Investor Relations section of AFC Gamma's website at afcgamma.com, along with our Q3 earnings release 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 and financial performance in 2023 and beyond, These statements are subject to inherent uncertainties in predicting future results and conditions. Please refer to AFC Gamma's most recent periodic filings With the SEC for certain significant factors that could cause actual results to differ materially from these forward looking statements and projections.

Speaker 1

During this call, we will also refer to distributable earnings, which is a non GAAP financial measure. Reconciliations of net income, the most comparable GAAP measure to Distributable earnings can be found in AFC Gamma's earnings release and investor presentation available on AFC Gamma's website. The format for today's call is as follows. Len will provide introductory remarks, an overview of our Q3 2023 performance and strategic commentary. Brandon will summarize our financial results, and we will then open the line for Q and A.

Speaker 1

With that, I will now turn the call over to our Chief Executive Officer, Leonard Tanenbaum.

Speaker 2

Thank you, Gabe. Good morning, and welcome to Amsterdam's earnings call for the quarter ended September 30, 2023. I would like to thank everyone for joining us today to discuss our results. Before turning to the quarterly results, we are very excited and I am personally excited to announce the appointment of Dan Neville, the new Chief Executive Officer of AFC Gamma effective this coming Monday. As Dan joins us in his new role, I will transition from Chairman of the Board and Chief Executive Officer to Executive Chairman of the Board and Chief Investment Officer.

Speaker 2

Dan joins us from Ascend Wellness Holdings, a leading multistate vertically integrated cannabis operator, where he has held various roles, including interim CEO and most recently as Chief Financial Officer. Dan joined Ascend as one of his first employees and he was instrumental in helping grow the company to an operator With 7 states, 2,000 plus employees and over $500,000,000 in revenue. Dan's expertise in cannabis operations, M and A activity and deal structuring uniquely positions him to lead AFC Gamma's CEO. We have noticed that as a lender, it has become increasingly important to have in house operating expertise to contribute to the underwriting and portfolio management of cannabis credits. Therefore, Dan's operating and M and A expertise, combined with my 25 years of direct lending experience, Position AFC Gamma to continue as a leading debt provider in the cannabis industry.

Speaker 2

We are very excited to have Dan join us as the team and I have worked closely with him on a number of matters when he was at Ascend. For example, we had the opportunity to witness Dan's expertise firsthand as he led Ascend's acquisition of certain assets of 2 of our portfolio companies. We've also been in frequent communication about the industry and investment opportunities with him over the years. We look forward to working with him to continue building AFC Gamma as we enter the next phase of the cannabis industry. The appointment of Dan as CEO reaffirms AFC Gamma's commitment to lending to the cannabis industry.

Speaker 2

As we have discussed on a quarterly basis over the last year, we are increasingly seeing cannabis 3.0 operators emerge, We are excited to deploy capital and expand AFC Gamma's platform as operators have a difficult time accessing the capital markets. I believe AFC Gamma is uniquely positioned to capitalize on the opportunity to provide capital to existing borrowers and new Well capitalized operators that are looking to build and or expand by buying distressed assets or assets at a significant discount. Turning to the quarterly results. For the Q3 of 2023, AFC Gamma generates distributable earnings

Speaker 3

of $0.49 per basic weighted average share of

Speaker 2

common stock. As a reminder, distributable earnings is the primary metric The Board considers when declaring AMC Gamma's quarterly dividend. The Board of Directors declared a $0.48 dividend per share in the September quarter. Since going public, we have generated distributable earnings that have met or exceeded our dividend each quarter and paid out $5.06 in dividends per share. In June of this year, management stated that we anticipated the $0.48 dividend represent The sustainable dividend level on the current portfolio for 2023, assuming no significant non accruals and without any additional investments.

Speaker 2

Despite our investment in Private Company G being put on non accrual for a period of time, we continue to believe that this is true for the remainder of 2023. Since mid-twenty 22, given the volatility in the cannabis market, we became increasingly selective on these new investments and maintained ample cash to capitalize on opportunities that may arise. We are excited about the new opportunities we are seeing, driven by an uptick in acquisition activity, both from existing operators buying distressed assets as well as new investors coming into the market to purchase assets at a significant discount. The capital formation around these assets is promising and we are focused on well capitalized operators in attractive states such as Missouri, Georgia, Maryland, Arizona and Ohio to name a few. Following our thesis during the quarter, We funded a new cannabis investment to Private Company M of approximately $25,000,000 into one of the newly formed well capitalized operators that we believe will continue to consolidate valuable assets in key limited license states.

Speaker 2

We continue to have liquidity to make additional investments in operators in limited license states that we believe have strong risk adjusted profiles. Additionally, we are pleased to see that the ballot initiative to introduce adult use in Ohio passed yesterday, which we believe will be a large positive for operators in the state. AMC Gamma has exposure to Ohio through 2 of our larger credit facilities, including our $84,000,000 commitment to subsidiary of Public Company H and a $63,000,000 commitment to Private Company L. We believe both operators should materially benefit from Ohio moving to a recreational model. As we are focused on active portfolio management, 2 borrowers have been placed into receivership to optimize operations and maximize value for the benefit of the creditors.

Speaker 2

1 of the borrowers, Private Company A, has been actively liquidating certain assets and has so far paid down over $48,000,000 in principal to AFC Gamma and Syndicate Partners, of which $27,000,000 was received during the quarter, primarily from the sale of its Maryland And Arizona operations. As we have discussed during the last several quarters, subsidiary of private company G, which we closely continue to closely monitor, Continues to have cash flow challenges as it completes a very valuable construction project in New Jersey. As we stated last quarter, We put subsidiary of Private Company G on non accrual for the month of June. As we did not receive interest payments in July August, the borrower remained on non accrual for those 2 months. To ensure the borrower has adequate working capital in New Jersey, we have modified interest payments for the remainder of the year.

Speaker 2

AFC Gamma has received its portion of the $800,000 in cash interest that was due for the month of September And the $1,000,000 of cash interest that was due in the month of October and $1,000,000 Cash interest is due in November December. As it relates to this loan, we are currently not accruing any interest into income that has not been paid in cash. We continue to remain excited about the near term prospects in New Jersey and look forward to the full optimization of their cultivation facility. As I previously discussed, we've recently focused on reducing payments in kind interest as a component of our income. During the Q1 of 2023, PIK or Payment in Kind as a percentage of income was 25%.

Speaker 2

But now for the quarter ended September 30, 2023, we have decreased that level to a much more normalized level of 10%. We are pleased about the significant decrease in PIK, which is mainly due to our active management. As we have said in past calls, we believe there are credible new cannabis operators entering the market that are well capitalized to take advantage of We are also pleased to have Dan join us and look forward to introducing him to our analysts and investors in the coming months. I will now turn the call over to Brandon to review our financial results.

Speaker 4

Thank you, Lynn. For the quarter ended September 30, 2023, We had GAAP net income of $8,000,000 or earnings of $0.39 per basic weighted average common share and generated net interest income of $15,300,000 and distributable earnings of $9,900,000 or $0.49 per basic weighted average common share. As previously mentioned, we believe providing distributable earnings is helpful to shareholders in assessing the overall performance of AFC Gamma's business. Distributable earnings represents the net income computed in accordance with GAAP, excluding non cash items such as stock compensation expense, any unrealized gains or losses, Provision for current expected credit losses also known as CECL, taxable resubsidiary income or loss net of dividends and other non cash items recorded in net income or loss for the period. We ended the Q3 of 2023 With $397,800,000 of principal outstanding spread across 12 borrowers, subsequent to September 30, 2023, we received Select principal prepayments of debt relating to Private Company A of $1,700,000 As of November 3, 2023, AFC Gamma had $395,100,000 of principal outstanding across 12 borrowers.

Speaker 4

As of September 30, 2023, the CECL reserve represents approximately 4.7% of our loans at carrying value, consistent with 4.7% as of June 30, 2023. The weighted average portfolio yield to maturity, which is measured for each loan over the life of such loan was approximately 19% as of September 30, 2023 November 3, 2023.

Speaker 3

Next, let's take

Speaker 4

a look at our balance sheet, which remains strong. As of September 30, 2023, we had total assets of 445,100,000 And cash and cash equivalents of $73,200,000 Additionally, we had 0 drawn on our line of credit, which provides us up to $60,000,000 in available funds that can be drawn as needed. Currently, the majority of our cash is earning interest of approximately 4.5% to 5.4%. As of September 30, 2023, our total shareholder equity was $338,800,000 and our book value per share was $16.56 On October 13, 2023, AFC Gamma paid a dividend of $0.48 per common share for the Q3 to shareholders of record as of September 30, 2023. Year to date, we have paid out dividends of approximately 99% of our distributable earnings.

Speaker 4

As a reminder, on an annual basis, Our dividend policy is to pay between 85% 100% of distributable earnings over the year. With that, I will now turn it back over to the operator to start the Q and A. Operator?

Operator

Our first question comes from Michael Elias with TD Cowen. Your line is open. Great.

Speaker 5

Thanks for taking the questions. Few, if I may. First, could you provide a bit of Color on why now was the time to make the CEO change? And perhaps as part of that, how we should think about the strategy moving forward, particularly as it relates to commercial real estate.

Speaker 2

Okay. I guess, let's start with the CEO change. I'm really pleased to get Dan. When Rob and I looked at each other, when we got buried in portfolio management, as we've talked about on these calls, And actually, I'm really, knock on wood, happy about the way things are turning out and turning the corner as a company. So I'm really pleased Having turned the corner, having said that, I think I forgot after I've done this for 20 years in direct lending, How much time portfolio management says and how really it's a strong and heavy lift.

Speaker 2

And Dan is an absolute So we said who's the one person that we really want in this industry, of course, excluding the founders who are also very good, but not available. And we came upon only one name, which was Dan. And it's a person that we frequently call, and I'm so I was so excited when he wanted to come. And so, I think he will be extremely additive and already has been additive in terms of, talking directly to our sponsors, Talking directly to our deal partners, we help a lot of our sponsors monetize many of their assets and that Our non core assets or even core assets in order to reduce debt or streamline their portfolio. And Dan is truly an expert in that category.

Speaker 2

So we're really pleased. It's a skill set that while I have some of, he's far better than I am. And so it's great to replace yourself in this role. I'm still there as Executive Chairman and Chief Investment Officer. It's great to replace the role with someone as good as he is.

Speaker 2

To your second question, we have not yet closed real estate. It's still an open ability for the company to do up to 35% Of our assets in real estate, we do have a ton of undrawn capital and liquidity. And due to our successful portfolio management, we're getting back more capital. So I expect going forward, we're hopeful to get both cannabis firing, and we did close one deal in cannabis, And real estate firing. So we have the company firing on all cylinders to get deployed.

Speaker 5

Got it. Then just building on that as a follow-up, If I take a look at the disclosures around the pipeline or the active pipeline, I noticed that the cannabis pipeline increased quite notably and real estate pipeline decreased. Just wondering particularly on the commercial real estate side, if you can just talk about some of the dynamics and the evolution of the market that you have seen And how your perceived market opportunity for axecam has evolved in that space?

Speaker 6

Hi, this is Robin. So on the cannabis side, I think we have reinvigorated our origination effort as we've seen more 3.0 players as Len Enter the market and there's been an uptick in acquisition activity by those players, which is why you've seen the cannabis pipeline increase. On the commercial real estate side, I think that as how we're positioning FC Gamma is more of a syndicate partner on that side, where we're not necessarily going to be leading transactions, but we do see opportunities in the commercial real estate sector where we can leverage others' expertise to be a co lender in those situations. So that's why you've seen that pipeline decrease A little bit and I think that's where you're getting the balance this quarter.

Speaker 5

Got it. And last question for me Could you just give us a sense of what to expect at your Analyst Day in December? And as part of that, is there an expectation for like a long Term financial outlook, any color there in terms of setting expectations would be helpful. Thank you.

Speaker 2

Oh, come on. You have to have a surprise, otherwise it's no fun. I'm previewing a little bit with my Board, who we're meeting over the next 2 days And introducing the Board to Dan, I think that has to happen first and let Dan get his feet wet. And I think you should expect Dan, to present, for Analyst Day and for therefore all of our investors, his vision In terms of the cannabis industry, where we see opportunities and how we're going to approach it differently. And I think that's pretty exciting.

Speaker 5

Awesome. Thanks for the color.

Operator

Thank you. Our next question comes from John Hecht with Jefferies. Your line is open.

Speaker 3

Good morning, guys. Thanks very much for taking my questions. And you talked about The recent, I think, was the election in Ohio. But I'm wondering, is there anything at the federal or any other state from a regulatory perspective that It opens up a market or provides a change in the opportunities for you guys.

Speaker 2

Three states that everybody is watching. So, Ohio, Pennsylvania and Florida. Florida lawsuits today or yesterday, I forget which one. So let's watch to see how that lawsuit goes where the governor is challenging it. My guide And it's just my personal opinion.

Speaker 2

I don't have any good information on this, but I don't think Florida goes rec. But you never know. At least, I think the governor is too far against it and there's 4 different Wordings that he's challenging, if any one of the wordings fails, I think it doesn't go through, from my understanding. But we'll see, like But not right now, you'll see tomorrow. From Ohio standpoint, look, I was hoping it would pass with over 60%, it passed with approximately 57% And the state Senate is going to go against it potentially.

Speaker 2

I think there's some good Threats of bringing this up next year in the election year, which is not where the Republicans wanted to be. So my hope is that Just leave us alone, hear the will of the people at 57%. I could be mistaken, but it seemed like it passed the cannabis passed with even a slightly higher percentage than the abortion 4th in the vote. So I think that's really positive for the cannabis industry in Ohio. That's going to really help a number of operators, including a lot of our credits that are there.

Speaker 2

And the last one is Pennsylvania. And the problem with Pennsylvania is even if Pennsylvania passes, it's Pennsylvania takes a long time to do anything. Remember, this is the state where you buy your liquor in a state controlled liquor store. So it's just a different state altogether.

Speaker 3

Okay. That's helpful. The second question is, I mean, you've become things have changed a little bit like your underwriting for kind of survivors or consolidators at the cannabis side. It looks like you're doing some specialty focus on realist commercial real estate opportunities. How have you changed the, Call it underwriting and investment approval process given that the scope has changed a little bit.

Speaker 2

So we've added to our investment approval process, which I still remain which I'm still Chief Investment Officer. We have 4 people now on committee, we added a very skilled player to the committee, which we needed, right? We have as we said, we have 2 in receivership and this and that. So We're really happy to have Bernie Berman join that committee. He's very, very skilled in this And we're happy to have him.

Speaker 2

And then Dan will be added after he joins on Monday to the Investment Committee, which so it will expand, which is really necessary to have more skill sets on investment committee and thinking through these opportunities. From a general standpoint, if you just think about it, The new players are buying things at pennies on the dollar, not pennies really, dollars 0.50 on the dollar. And Cannabis operators in general have built these cannabis facilities and dispensaries at 100 or more than 100 due to delays, Permitting delays and construction delays. And so if you think about that competitive advantage also of not having sale leasebacks that have now into the 15% range in some cases, debt loads that are out of control in some cases, including debt costs, which are in the mid to high Double digits even for the largest MSOs, and you could see them trading. This is a real competitive advantage for the new well capitalized Companies and we feel very comfortable that they have not only competitive advantage in terms of capital, but many of these are run by really good operators That have learned through the business and so we're excited to back them and back their growth.

Speaker 3

Great. Thanks very much.

Operator

Thank you. Our next question comes from Mark Smith with Lake Street. Your line is open.

Speaker 3

Hi, guys. Len, just give us a good update on some of the new states and things that you're watching. Can you just give us Quick update on states where you are today, any that maybe you're seeing some signs of improvement Or any that maybe haven't bottomed yet and have moved down lower?

Speaker 2

Look, I think all states have Thank God, all states have bottomed, but bottomed at really bad levels in terms of California, Oregon, Washington, Colorado And the lot of Michigan, the unlimited license states have gotten or have gotten your per pound price below marginal cost of production. So those non vertically integrated operators have really gotten killed. And that's part of the real problem. You have If your marginal cost of production is below price is below that, you just want to buy for your dispensary and capture margin. And so And Arizona is a good example of that.

Speaker 2

You've seen that in Michigan for sure. Having contrast with that is high end or high end brands or well regarded brands Like the one that we back in Michigan, even though, it's had its challenges, they're paying our interest in cash. They're making very good cash flow and that's in a very tough state. And why is that? Because the product is very well regarded.

Speaker 2

And so there are pockets of bright light even in the unlimited license states. That's our only one, But we're pretty happy about the way it's performing. There are cannabis operators, for example, our credit in Pennsylvania That generates so much cash that we have cash flow sweeps every quarter and our loan has been paid down significantly almost in half, Brandon?

Speaker 4

A little less than half, but yes.

Speaker 2

Yes. And so we expect to be fully paid on that loan should we not convince them to do a dividend recap or something else by next year, Because they're performing so well and generating so much cash flow, that's a loan, for example, that we have an exit fee at the end of that loan. And If when they fully pay off the loan, we expect to get paid that exit fee. And so we should have a benefit next year from that. So It's not like all loans are bad or all loans are good.

Speaker 2

All loans in one state are bad or one state. It's really company specific company operations, the way they're constructed and their market positioning.

Speaker 3

Perfect. And then last question for me. Any updated thoughts as you look at the portfolio and where you want to be in Fixed versus variable rates.

Speaker 2

I think it is not important anymore. Look, I've managed portfolios, including a $5,000,000,000 asset manager before I sold it to Oaktree. And I you always want to be in variable rates when rates are rising. You want to be in fixed rates when rates are dropping. I think this whole concept of being more in variable rates today is not important.

Speaker 2

I think you want to be I personally would rather be fixed than floating today at this moment. I think the Federal Reserve in general As either stop raising interest rates or within 0.5 point of the stop in raising interest rates, I think the inverted yield curve will reverse next year. And I think this is a good time to have more fixed rate than floating rate. So I know that that's been exciting. We've actually done a really good job

Speaker 3

Great. Thank you.

Operator

Thank you. There are no further questions at this time. I'd like to turn the call back over To Len Tenenbaum for closing remarks.

Speaker 2

Thank you all for attending. As it was mentioned on the call, we look forward Dan takes over the CEO slot to providing more information about his vision and our new very strong push into cannabis. So thanks very much.

Operator

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

Powered by Quartr
Earnings Conference Call
AFC Gamma Q3 2023
00:00 / 00:00