AFC Gamma Q2 2023 Earnings Call Transcript

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August 8, 2023

There are 4 speakers on the call.

Operator

Good day, everyone, and thank you for standing by. Welcome to the AFC Gamma Second 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. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Gabriel Katz, Chief Legal Officer.

Speaker 1

Good morning, and thank you all for joining AFC Gamma's earnings call for the quarter ended June 30, 2023. I'm joined this morning by Leonard Tannenbaum, our Chief Executive Officer Brandon Hetzel, our Chief Financial Officer and Robin Tannenbaum, our President. Before we begin, I would like to note that this call is being recorded. Replay information is included in our July 24, 2023, press release is posted on the Investor Relations section of AFC Gamma's website at afcgamma.com, along with our Q2 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 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. During this call, we will 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 both AFC Gamma's earnings release and investor presentation available on AFC Gamma's website. The format for today's call is as follows.

Speaker 1

Len will provide introductory remarks, an overview of our Q2 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. Good morning and welcome to AFC Gamma's earnings call for the quarter ended June 30, 2023. I'd like to thank everyone for joining us today to discuss our results. Turning to the quarterly results for the Q2 of 2023, AFC Gamma generated distributable earnings of $0.49 per basic weighted average share of common stock. As a reminder, Distributable earnings is the primary metric that the Board considers when declaring AFC Gamma's quarterly dividend.

Speaker 2

The Board of Directors declared a $0.48 dividend per share for the June quarter. Since going public, we have just generated distributable earnings that have met or exceeded our dividend in each quarter and paid up $4.58 in dividends per share. Since mid-twenty 22, given the market and interest rate volatility, AFC Gamma has taken a conservative view to deploying capital. We have raised the bar on originations and maintained ample cash on our balance sheet to capitalize on opportunities that may arise. As we stated last quarter, we continue to see an uptick in acquisition activity in the cannabis market, both from existing operators buying distressed assets as well as new investors coming to the market to purchase assets with a significant discount.

Speaker 2

The capital formation around these assets is promising. We continue to believe that there are investable states in cannabis, including Missouri, Georgia, Maryland, Arizona and Ohio to name a few. Subsequent to quarter end, 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. We continue to have liquidity to make additional debt investments in operators and limited license states that we believe have strong risk adjusted profiles. Turning to our current portfolio.

Speaker 2

We have made substantial progress in reducing our exposure to underperforming assets and continue to actively portfolio manage them. We believe that our focus on targeting operators in limited license states has set us up to mitigate certain risks. During the June quarter and subsequent to quarter end, We have been active in monetizing collateral to reduce exposure to these underperforming credits. We've received select Principal, prepayments and or Solanpar $43,400,000 of debt in these credits, which I will now describe in further detail. In May of 2023, we placed Private Company I, which was rated a Category 4 loan under our CECL analysis in foreclosure.

Speaker 2

We sold 2 thirds of the credit facility to a multi state operator at par And have a put rate on remaining 1 third immediately prior to the transfer of 1 of the borrower's cannabis licenses. The multi state operator is now leading the foreclosure process and we expect that we will have a full recovery on the remaining 1 third of our debt outstanding. This asset remains rated as Category 4 loan under our CECL analysis. Additionally, during the quarter and subsequent to quarter end, AFC Gamma and its Syndicate Group received a pay down of approximately $45,900,000 of Private Company ACE credit facility from the borrower sale of its Maryland and Arizona assets. This is another example of AFC Gamma's active portfolio management approach to derisk underperforming assets.

Speaker 2

Lastly, we were a small co lender as part of a larger credit facility to a subsidiary of Private Company each. During the quarter, we successfully exited the loan as it matured and we did not participate in the refinancing. We received a repayment of all principal, accrued interest and agencies. As we have discussed during the last several quarters, Private Company G, which we were closely monitoring, continues to have cash flow challenges. While private company G which pays interest in arrears paid its full monthly interest remaining cash, they did not pay any interest for the month of June and are now 30 days past due.

Speaker 2

Additionally, during July, they made the decision to lay off their management team, including the CEO and CFO. While we continue to engage with Private Company GE's restructuring team, we have put them on non accrual for the month of June. We remain excited, however, about their near term prospects in New Jersey and look forward to the full optimization of their cultivation facility in September. We may need to inject additional capital to the specific project to complete the full build out in New Jersey. In order to reduce our exposure to this underperforming asset, we've initiated a consensual foreclosing proceeding with respect to the borrowers' 3 Pennsylvania dispensaries.

Speaker 2

We expect that the net cash proceeds of the public auction will be used to prepay a portion of the principal outstanding under our credit facility. All interested parties should contact PPL Group to participate in the UCC Article 9 foreclosure auction, which is scheduled for September 6. Additionally, Private Company G has told us that they intend to sell certain non core, non collateral assets to contribute towards interest payments and its expansion of its New Jersey operations. As we have said in past calls, we believe there are credible Newer cannabis operators entering the market that are well capitalized to take advantage of the current market environment and we are pleased to begin investing in this next phase of campus industry. As you may have seen in today's Wall Street Journal, in the article titled New Lending by Mortgage REITs Has Dried Up, Very informative article.

Speaker 2

The opportunity in non cannabis real estate continues to grow and it centers around the regional banks and mortgage REITs limiting the amount of capital they are lending on a loan to cost basis. As a result, this creates an opportunity for alternative lenders like us to fill that void. We continue to Interesting deals in commercial real estate and have formed a strong pipeline of these opportunities and are working through several deals in the term sheet stage. With that, I'll turn over the call to Brandon to review our financial results.

Speaker 3

Thank you, Lynn. For the quarter ended June 30, We had GAAP net income of $12,100,000 or earnings of $0.59 per basic weighted average common share and generated net interest income of $16,100,000 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 AFG 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 TESOL, taxable REIT subsidiary income or loss net of dividends and other non cash items recorded in net income or loss for the period. We ended the Q2 of 2023 with $397,100,000 of principal And we are now standing spread across 11 borrowers.

Speaker 3

Subsequent to June 30, 2023, we funded $25,000,000 to private company M. As of August 4, 2023, AFC Gamma's portfolio consisted of $437,500,000 of current commitment with $425,700,000 funded across 12 borrowers. As of June 30, 2023, the CECL reserve represented approximately 4.7% of our loans at carrying value compared to 5.4% at March 31, 2023. The decrease in the reserve was mainly driven by the sale of 2 thirds of the loan to private company I during the quarter. The weighted average portfolio year to maturity, which is measured for each loan over the life of such loan was approximately 21% as of June 30, 2023 and 20% as of August 4, 2023.

Speaker 3

Next, let's take a look at our balance sheet, which remains strong. As of June 30, 2023, we had total Assets of $454,000,000 and cash and cash equivalents of $82,100,000 Additionally, we had 0 drawn on our line of credit, which provides us up to $60,000,000 in available funds to be drawn as needed. Currently, the majority of our cash is earning approximately 4.3% to 5.4%. As of June 30, 2023, our total shareholders' equity was $340,300,000 and our book value per share was $16.64 On July 14, 2023, AFC Gamma paid a dividend of $0.48 per common share for the Q2 to shareholders of record as of June 30, 2023. Year to date, we have paid out dividends of approximately 99% of our distributable earnings.

Speaker 3

As a reminder, on an annual basis, our dividend policy is pay between 85% 100 percent 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

Thank you. Thank you. I will open the lines now for the audience. If you do have a question, that is star 11 to get in the queue. One moment while we compile the Q and A roster.

Operator

I would like to turn the call back to Lynn Tanenbaum for final remarks.

Speaker 2

Thank you so much. Thanks everyone for attending the call. Look forward to reporting to you next quarter.

Operator

And with that, we thank you for participating in today's program. You may now disconnect.

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AFC Gamma Q2 2023
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