FTI Consulting Q1 2023 Earnings Call Transcript

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May 10, 2023

There are 4 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the AFC Gamma First Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Gabriel Katz, Chief Legal Officer. Please go ahead.

Speaker 1

Good morning, and thank you all for joining AFC Gamma's earnings call for the quarter ended March 31, 2023. I'm joined this morning by Leonard Tanenbaum, our Chairman and 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 April 25, 2023, press release and is posted on the Investor Relations section of afcgamma's website at afcgamma.com, along with our Q1 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, Future market developments, anticipated portfolio yield and financial performance and projections in 2023 and beyond.

Speaker 1

These statements are Distributable earnings, which is a non GAAP financial measure. Reconciliations of non income of net income to 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 and overview of our Q1 2023 performance And strategic commentary, Brandon will summarize our financial results, and we will then open the line for Q and A. With that, I will now turn the call over to our Chief Executive Officer, Leonard Tanenbaum.

Speaker 2

Thank you, Gabe, and good morning, and welcome to FC Gama's earnings Call for the quarter ended March 31, 2023. I would like to thank our analysts and investors for joining us today to discuss our results. Before turning to the quarterly results, I want to take a moment to congratulate Brandon Hetzel on his promotion to Chief Financial Officer. We are excited to have Brandon as our CFO as he has been integral to the company's success since he joined in September 2020, most recently serving as Executive Vice President and Controller. Brandon brings with him a detailed knowledge of our business and over a decade of real estate experience, which will be valuable as we expand our investment strategy to include traditional commercial real estate investments.

Speaker 2

Turning to the quarterly results for the Q1 of 2023, AFC YAMA generated distributable earnings of $0.57 per weighted average share of common As a reminder, distributable earnings is the primary metric that the Board considers when declaring AFC Gamma's quarterly dividend. The Board of Directors declared a $0.56 dividend per share for the March quarter, which was in line with the previous 3 quarters. Since going public, we have generated distributable earnings in excess of our dividend in each quarter and paid out $4.10 in dividends per share. We are pleased that we have continually out earned our dividend, yet we are cognizant that payment in kind interest currently makes up a meaningful portion of our earnings. The majority of the payment in kind interest earned in the March quarter is due to one loan, which we expect to revert to cash pay beginning in June.

Speaker 2

Should this borrower, which is rated a Category 4 under our CECL reserve, pay its June interest in cash, we would anticipate the level of PIK interest As a percentage of investment income to decrease over the next few quarters. Since mid-twenty 22, Given the market and interest rate volatility, AFC Gamma has taken a conservative view to deploying and managing our capital. We've raised the bar on originations, Sought additional equity from borrowers to support their businesses and maintained ample cash on our balance sheet to capitalize on the opportunities as they may arise. Until recently, cannabis market fundamentals that were challenged due to the oversupply from the illicit market produced Product crossing state lines and Delta-eight and hemp product conversions have been improving. Recent state authorities have been cracking down on legal activities and confiscating illicit products.

Speaker 2

One immediate result of this crackdown on the illicit There has been an increase in distillate prices in many states such as Michigan, in which we've seen an increase in 1 liter of distillate Pricing from approximately $2,000 to $8,000 with pricing even higher in Pennsylvania and New Jersey. The rise in distillate prices has also driven the rise in trim prices and flower prices as a consequence of that. We believe this uptick in pricing should last for at least the next few months and drive higher revenues for cannabis operators. Despite this positive momentum, we are cognizant that large inflows do come online with the October harvests, which may drive prices downward due to increased supply. But we do remain optimistic longer term that prices may have bottomed.

Speaker 2

Additionally, there have been positive trends in several states in recent months following the legalization of adult use. In particular, Missouri and New Jersey have surpassed our initial expectations for adult use sales. As of May 1, approximately 20% of our portfolio based on commitments has Significant Missouri exposure and those borrowers have benefited from a cannabis market has outperformed expectations. This was a market we thoroughly diligence made several sizable investments in and given product shortage in the market, we believe will continue to perform well for the foreseeable future. Lastly, we are starting to see 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 Significant discounts.

Speaker 2

The capital formation around these assets is promising and we continue to believe that there are several investable states Including Missouri, Georgia, Maryland, Arizona and Ohio to name a few. We believe that our focus on Targeting operators and limited license dates has set us up to mitigate certain risks. Additionally, our focus on enterprise value lending and having cash flow cash equity below our debt provides a credit enhancement that ensures value declines are first absorbed by the equity before we would be impaired. We have taken credit reserves with our CECL reserve currently at 5.4% on March 31, 2023, up from 5% as of December 31, 2022. We continue to closely monitor the large loan we downgraded as Category 4 last quarter.

Speaker 2

The borrower is projecting an experience in increased revenue based on the launch of adult use in the core state, but still has cash flow challenges. The borrower's sponsor has contributed significant additional equity. And as discussed earlier, AFC Gamma allowed a portion of the interest to be paid in kind to assist with some of the cash needs. The borrower is having difficulty raising additional equity in the capital in this market in the cannabis industry and has agreed to sell certain non core assets to generate additional capital for its operations. In conjunction, the borrower also agreed to add additional real property to our collateral pool and sell that non core property to pay down the accrued PIK interest that we incurred.

Speaker 2

As stated earlier, the borrower is scheduled to move back to paying full cash interest beginning in June. With our strong liquidity position, we continue to focus on originating and evaluating compelling 1st and second lien commercial real estate financing opportunities as well as additional deals in the cannabis market. The recent real estate deal volume has been slower than the preceding years and there's been a discrepancy between bids and offers. We are beginning to see the repricing in certain real estate markets and we are evaluating non cannabis commercial real estate that's attractive from both the risk and return perspective. The overall macroeconomic environment has made it somewhat difficult to raise equity raise the equity that lenders are demanding to complete deals.

Speaker 2

While this may be while we may be the lender on many deals, these same deals also need other components such as mezzanine and preferred equity to We are focused on originating loans in the Southeastern United States based upon the favorable demographic trends, Growing markets as well as our local presence and network. Given the various regional bank failures and the rising interest rate environment, Banks have reduced their traditional real estate lending activity, which has now created a void in the market for alternative lenders such as us to invest in deals with enhanced yields and strong risk adjusted returns. Looking ahead, I am excited about the trends in cannabis becoming more positive as well as the non cannabis real estate opportunities that are beginning to form as regional banks have pulled back from lending. We believe that AFCGem is well positioned to navigate the current market environment and opportunistically invest our capital in deals with strong risk adjusted returns. I will now turn the call over to Brandon to review our financial results.

Speaker 3

Thank you, Lynn. We are pleased to report strong results in the Q1 of 2023. For the quarter ended March 31, 2023, we had GAAP net income of $10,000,000 or earnings of $0.49 per basic weighted average common share And generated net interest income of $16,800,000 and distributable earnings of $11,600,000 or $0.57 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, Provisions for current expected credit losses, also known as CECL taxable REIT subsidiary income or loss, net of dividends and other non cash items recorded in net income or loss for the period.

Speaker 3

We ended the Q1 of 2023 with 390.9 1,000,000 of principal outstanding spread across 12 borrowers. Subsequent to March 31, 2023, we funded an additional 9,000,000 To a subsidiary of Public Company H. As of May 1, 2023, ASC Gamma's portfolio consisted of $415,400,000 of current commitments With $399,800,000 funded across 12 borrowers. As of March 31, 2023, the CECL reserve represents Approximately 5.4 percent of our loans at carrying value compared to 4.97% at December 31, 2022. We currently have 1 borrower on non accrual, which represents 0.9% of our portfolio.

Speaker 3

The weighted average Portfolio yield to maturity, which is measured for each loan over the life of such loan, was approximately 21% as of March 31, 2023 May 1, 2023. During the Q1 of 2023, we repurchased $10,000,000 in principal amount of our 2027 senior notes at 77.4 percent of par value. This resulted in a gain on extinguishment of debt of approximately $2,000,000 This gain was partially offset by approximately $700,000 in severance expense related to the prior CFO, which was recorded within general and admin expense in the Q1. Next, let's take a look at our balance sheet, which remains strong. As of March 31, 2023, we had total assets of $447,800,000 And cash and cash equivalents of $80,600,000 Additionally, we had 0 drawn on our line of credit, which provides us of up to $16,000,000 in available funds that we can that can be drawn as needed.

Speaker 3

Currently, the majority of our cash is earning approximately 3.5% to 4.5%. As of March 31, 2023, our total shareholders' equity was $337,900,000 and our book value per share was $16.49 On April 14, 2023, AFG Gamma paid a dividend of $0.56 per common share for the Q1 To shareholders of record as of March 31, 2023, year to date, we have 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% 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

Thank you. Please standby, we compile the Q and A roster. And I am showing no questions from our phone lines at this time. I would now like to I'll turn the conference back over to Lynn Tanenbaum, CEO for any closing remarks.

Speaker 2

Since I did such a good job describing everything, I guess there is no questions today. So I want to thank everyone for being on the call and look forward to reporting next quarter.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

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