Q1 2021 AFC Gamma Inc Earnings Call

May 11, 2021

[music].

Good day and thank you for standing by welcome to the AFC Gamma Q1, 2021 earnings conference call.

At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session. Two basket question. During this session you will need to press star one on your telephone please.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Francesca Smith. Thank you. Please go ahead.

Thank you Chelsea good morning, and welcome to AFC Gamma Inc. First quarter 2021 earnings Conference call I Am joined this morning by Leonard Tannenbaum, Chief Executive Officer, Jonathan Calico head of real estate Robin Tanenbaum head of origination and Thomas Jaffray, Chief Financial Officer.

Before we begin I would like to note that this call is being recorded replay information is included in our April 26, 2021 press release and is posted on the Investor Relations section of AFC Gamma website FC Gamma <unk> Dot com.

On with our first quarter 2021 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 size expected consolidation in the industry future events and financial performance.

These forward looking statements are subject to the inherent uncertainties in predicting future results and conditions.

Certain factors could cause actual results to differ materially from those projected in these forward looking statements new risks and uncertainties arise over time and it is not possible for the company to predict those events or how they may affect it. Therefore, you should not place undue reliance on these forward looking statements.

We ask that you refer to our most recent filings with the SEC for important 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 our earnings release or in the investor presentation available on our website.

The format for todays call is as follows Len will provide introductory remarks, an overview of our results and strategic commentary John will discuss our real estate lending environment, Robyn will discuss the origination pipeline and Tom will summarize the financials. Then we will open the line for Q&A.

With that I will now turn the call over to our Chief Executive Officer Len Tannenbaum. Thank you Francesca and welcome to AFC Gamma as first quarter earnings conference call I would like to thank our current shareholders prospective shareholders and analysts for joining us today.

We are excited to have gone public on NASDAQ as the first U S listed cannabis lender on March 19, 2021, with the IPO process behind US our team is focused on continuing to build a leading institutional cannabis lending platform.

Today I want to provide an overview of FC gamma and the many opportunities that we have in front of us.

First let me share who we are and what we do.

AFC gamma as an institutional provider loans to the cannabis industry structured as a real estate investment trust from.

The loans that we make are typically secured by three pillars cash flow licenses and real estate.

The companies that we lend to a domestic single and multi state operators, which include those that are privately held as well as those listed on the Canadian exchanges.

Since the IPO, we've completed several deals and expanded into a number of new states, including Texas, Missouri, and New Jersey.

Just some highlights on those three states.

We are really excited about Texas.

Currently only three licenses from the state and given its potential market size. We believe it is going to be one of the largest revenue generating space.

Missouri is a really interesting space given patient growth, but also the fact that the residency requirement makes it difficult from multistate operators to enter.

Which should provide our borrowers an opportunity to make outsized returns.

And New Jersey, which recently legalized adult use cannabis. We believe will also see significant growth in required almost $1 billion buildout.

Our robust pipeline of potential borrowers includes many operators expanding into new states.

We believe that accompany loan is preferred over sale leaseback, though we do see both sources of financing being successful given the extremely high demand for capital in the current environment.

Turning to the industry. The cannabis market continues to rapidly evolve and growth I've heard it like into dog years, one year on cannabis is equal to seven.

We continue to be excited about the massive opportunities ahead as more states legalize both medicinal and our adult use cannabis.

This dynamic is causing an increased demand for capital to quickly scale.

<unk> license requirements and build a presence in that given state for current.

For instance, when new Jersey legalized late last year, we estimate the amount of capital needed to build that state is close to $1 billion.

And with its bordering state New York recently legalizing adult use we believe that capital buildup could reach $3 billion to $5 billion, which supports the forecast for New York for 2025 cannabis revenue of over $5 billion.

We closely monitor the industry and have also watch the recent M&A boom with many large public multistate operators using a combination of equity debt and cash as a current as currencies to acquire the smaller single state operators.

We believe we are on a one to two year period of consolidation, where the big operators will continue to get bigger.

We remain focused on lending to operators in limited license markets as we believe licenses in those states of additional value as a form of security.

Additionally, our business contains many barriers to entry, including licensing approval by various state regulatory agencies and states, such as New Jersey, Ohio, Arizona and Missouri.

Our goal is to be the lender of choice to half of the top.

15 multistate operators.

As well as companies other seeking to achieve scale, which seek to be acquired by a multistate operator.

We lend at different rates to the top msos, the mid size operators and smaller single state operators, we maintain a high degree of selectivity and the stringent lending criteria backed by our three pillars cash flows licenses and real estate.

Turning to our capital structure, we are pleased to be a NASDAQ listed company and have already found that the visibility into our capital structure is a competitive differentiator.

Many borrowers have found that one of the challenges in the industry is finding lenders that can commit to the full amount of capital without having to raise it from a third party.

The IPO has helped us compete for and win deals as our available capital and hold size has greatly expanded.

As we continue to source and evaluate new transactions, we have grown our team and continue to build out our corporate infrastructure.

And as I mentioned, our pipeline remains robust since.

Since January of 2020, we have viewed over $5 billion in transactions and we currently have an actionable pipeline of over $500 million.

As a reminder, the actionable pipeline could take between three and nine months to close upon a transaction.

And many of the deals that we complete our high touch on nature and requires significant due diligence to potentially regulatory approval, making it difficult to predict the exact timing of closings.

We are pleased that our board of directors has declared a quarterly dividend of <unk> 38 per share for the June quarter.

We intend to pay regular quarterly dividends that are covered by our distributable earnings. Additionally.

Additionally, our dividend policy is to pay 90% to 100% of distributable earnings over the year with a special dividend at the end of the year if necessary paid in January of the following year.

Lastly, as a newly listed company, we plan on giving on having a higher level of communication regarding our progress and outlook. This year I will now turn it over to our partner John Thanks Lynn.

As Len mentioned cannabis is currently regulated at the state level. Each state that has legalized cannabis has decided whether to allow recreational or medicinal use each of these states has also decided how many cultivation and dispensary licenses it would offer.

AFC G focuses on states that have a limited number of licenses such as Florida, and Arizona intends to avoid states like California, Oregon, and Washington with fewer controls on the number of cannabis licenses available.

Since we are structured as a mortgage REIT, we have a lien on the commercial real estate underpinning the loans were originated.

Our real estate centric approach to lending is critical to generating attractive risk adjusted returns in this industry. However, real estate is only one aspect of the collateral package the other components being the equipment the license on the company's operations.

Before we make alone we performed rigorous diligence on borrowers and on the real estate to ensure there are no material issues, we wish to minimize risks that could diminish the borrower's collateral value should the worst case scenario result on a borrower defaults on our loan.

It is incumbent upon our team to ensure that each aspect of the property is addressed prior to the origination of the loan.

Proper permitting environmental issues and zoning all must be vetted ahead of time.

At AFC gamma when we coupled the real estate with licenses and equipment, if a borrower gets into trouble on defaults with no option, but to transfer title, we can offer and deliver a higher value collateral package to a buyer versus one where only the value of the property was considered now let me turn the call over.

To Robin who will speak about the origination process. Thank you John the job on the origination team is to be in the center of the industry NCA all deals in the market to understand the lending environment overall market opportunity and state by state dynamics, we have more than 93rd party relationships that we source deals from.

We do both direct outreach to companies and third parties and we also received inbound interest based on our track record borrower relationships and deals that we have completed we have found that incumbency also gives us an important edge when sourcing potential deals as our borrowers continue to grow both organically and via acquisitions.

We believe that we are in the center of the candidates ecosystem with deep relationships with many of the companies as it relationship lender, we strive to help great entrepreneurs build their businesses and succeed. We are also proud that two of our portfolio companies and one in our actionable pipeline are led by female Ceos.

As Len mentioned from January 2020 through April 32021, we absorbed over $5 billion of transactions, which represents over 285 deals. So how do we structure the loan it starts with our over $5 billion of loans that we've looked at and narrow those down to over 500.

Of an actionable pipeline as John outlined is an arduous process, we filter to get to the states. We launched alone. In then we closely examine each target companies profile, including cash flow reputation real estate coverage license value and competitive positioning within this day and these initial.

Quarters ahead of our deal flow will be an important engage to monitor performance. We plan to announce each daily close to provide greater transparency and measure our progress to the investment community. When we our lead agents in summary, we are proud of the strong reputation AFC has already built in the industry as an institutional.

Under and believe our borrowers can feel confident that we are a lender. They can trust when we say we will do something we do it I will now turn it over to Tom to talk about the financials.

Thank you Robyn we ended the first fiscal quarter of 2021 with total assets of $221 5 million as compared to $93 6 million at December 31 2020.

Portfolio investments totaled $97 2 million of principal outstanding with a carrying value of $92 6 million spread across eight companies as of March 31 2021.

In March 2021, the company completed its initial public offering which resulted in the issuance of $7 million 187500 shares at $19 per share with total net proceeds after fees and expenses of $124 million.

At the end of the March quarter book value per share was $16 18, as compared to $14 83 at the end of the December quarter and increase of nine 1%.

As of March 31, 2021, AFC gamma portfolio consisted of $137 million of transactions with $97 2 million funded.

Following quarter end, we closed an additional $50 million of transactions with $48 3 million funded across seven borrowers.

Currently.

We have completed $165 6 million of transactions with $133 4 million of funded principal outstanding to 10 companies in 12 states.

All loans in the portfolio are current and performing.

The weighted average portfolio yield to maturity is approximately 23% as of March 31 2021.

Compared to 21, 7% at December 26, 2020, as previously disclosed on the company's formats 11.

The weighted average yield to maturity of the portfolio as of April 32021 was approximately 21% as adjusted to exclude the impact of prepayment and exit fees collected which resulted in a higher and not necessarily indicative of expected yield to maturity for the other loans in the portfolio.

For the quarter ended March 31, 2021, we had GAAP net income of $1 4 million or earnings of <unk> 20 per.

Per basic weighted average common share for the three months ended March 31, 2021, we generated a total investment income of $4 7 million and distributable earnings of $3 two.

$2 million or <unk> 45 per basic weighted average common share.

Distributable earnings represents the net income computed in accordance with GAAP, excluding noncash items, such as noncash equity compensation expense.

Unrealized gains or losses.

Provision for current expected credit losses, commonly referred to as seasonal.

Or other noncash items recorded in net income for the period.

Seasonal was early adopted by the company in fiscal year 2020.

As of March 31, 2021, the seasonal reserve represented approximately 125% of loans of carrying value compared to 132% at December 31 2020.

One of the adjustments to arrive at distributable earnings is.

It is a onetime noncash stock compensation expense.

<unk> 22 per basic weighted average common share pursuant to stock option grants effective as of the initial public offering.

All other adjustments in aggregate to arrive at distributable earnings of <unk> 45 per basic weighted average share of common stock amounted to <unk> <unk> per basic weighted average common share and included both the impact of the noncash adjustment to the <unk> reserve and change in unrealized.

Gains.

We believe providing distributable earnings is helpful to stockholders in assessing the overall performance of our business.

As a REIT, we are required to distribute at least 90% of our annual REIT taxable income.

We believe that dividends are generally one of the principal reasons that stockholders invest in our common stock, we generally intend to pay dividends to our stockholders.

In an amount between 90 and 100% of our taxable income.

On May seven 2021.

The board of directors declared a dividend of <unk> 38.

Per common share outstanding.

For the June quarter payable on June 32021.

To shareholders of record on June 15th 2021.

Our board of Directors currently believes.

That our distributable earnings in the second quarter will be in excess of our declared dividend and the dividend will represent 75% to 90% of estimated second quarter distributable earnings.

In May 2021, the company amended its secured revolving credit loan agreement to among other things increase the low commitment from $40 million to $50 million.

Decrease the interest rate from 8% to 6% per year.

And extend the maturity date up to December 31, 2021.

Currently no draws on our revolving credit facility have occurred during the fiscal year to date and no interest or fee expense were incurred related to the revolving credit facility.

The revolving credit facility is an important components of the company's business strategy to offer greater flexibility manage liquidity and bridge, it's investment commitments through future capital raises.

Thereby potentially reducing the impact of cash drag on our returns to investors.

I will now turn it back over to line.

Thanks, Tom.

Before we move on to the Q&A portion of this call I wanted to address the legislative environment, which is an important area of interest for our stakeholders.

Recently, the United States House of Representatives passed the Safe Banking Act for the fourth time.

Which may once again face obstacles passing the Senate.

We believe this piece of legislation will be beneficial to the industry and to AFC gamma.

The safe Banking Act.

May allow for operators to have more banks to deposit their cash flow.

They also allowed the ability for consumers to use credit cards, and dispensaries, where cash is currently the predominant currency.

In relation to FC gamma while it may provide for increased competition from state chartered banks, we believe that it could provide us with more cost efficient capital.

Today AFC Gamma has a strong balance sheet increased access to capital and the best in class team with years of combined lending experience and real estate experience.

We believe that we are ideally positioned as a first mover and a rapidly growing market poised to deliver enhanced value for our shareholders I will now turn it back over to the operator to start the Q&A.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby, while we compile the Q&A roster.

Your first question comes the line of Aaron Hecht with JMP Securities JMP Securities.

Hi, everyone.

Gross and hold on your first earnings call.

And Karen.

Yeah. So in terms of the committed capital to invest in capital.

Sounded like like committed is up around 60 million since the IPO and if I heard correctly, 40% to $50 million.

<unk> been investing in that sounds like a pretty quick pace that you guys are putting money to work.

Is it reasonable to assume that that pace.

And then once you get the full deployment of your liquidity how would you.

Rank your options for additional capital.

I'll, let robin answer the first part and I'll take the second part.

So yes, thanks, Eric for your question year to date, we originated about $70 million of deals and how we think about it is if you extrapolate that out you can assume about 200 million of originations for the year, we expect that our origination volume should increase over time as our team continues to grow and new states come on line.

<unk> of our actionable pipeline of approximately $500 million, we believe that about two thirds of deals will come to fruition. Although as we've stated deals may take three to nine months to close and as candidates is a fast moving industry, it's difficult to predict how and when our pipeline will convert to close deals for instance.

As Lynn described earlier, while we're very excited about the state of New York, We do not currently have any deals for New York and the actionable pipeline. So as I said earlier at monitor our press releases, where we plan and let me clarify my earlier statement plants. It really announced deals that we are the lead agent on Sofia two follow ups, there you'll be able to see as we convert pipeline.

To close deals thing as you pointed out to us.

For the second part of your question Erin.

<unk>.

Difficult to predict when deals close and low quarter they closing.

We're constantly monitoring that and and going to match our match our available capital against those.

Those prospects and the potential closings.

We'll continue to monitor that as we closed sales.

Gotcha, and then in terms of.

<unk> you put out the the dividend number.

Distributable earnings guidance range.

What are the factors that can push you towards the low or the high end of that range.

And.

How should people be thinking about.

Potential dividend catch up in the remainder of the year and what are the factors playing into that.

Well I think this is our first quarterly conference call as you point out so were still the board I think is still determining how to play out the dividend policy over time, but I think they have determined is they want to pay a dividend substantially below.

Total regular quarterly dividends or <unk>.

The distributable earnings.

Earnings that we have so that's why we have that 75% to 90% range. Obviously, we are only midway through the quarter and the board was comfortable enough to predict the range. What changes that is time is very simple and I think we mentioned it before right it's timing of deal closings and so.

Any any material deal that we lead agent, we're going to you're going to announce we're not announcing all deals, but we'll announce the material deals that we lead agents. So that should give a good sense for our pace of investment.

Gotcha, Thanks, a lot and congrats.

Thank you.

Your next question comes on line Owen Bennett with Jefferies.

Good morning, guys hope all well.

Good morning.

And I just wanted to come back to the pipeline plays in a couple of questions related to that and firstly and obviously, we've seen additional geographic diversification now can we expect more of that and with the pipeline as it stands right now and then.

And secondly, obviously demand for capital increasing while at the same time, we've generally seen the cost of capital coming gain are you finding that you're having to walk from more favorable terms for new sales now on it.

Sure.

Maybe six months ago. Thank you.

Two good questions there is no debt.

We are looking forward to continued geographical diversification I think we're investing in 11 States filed 12 status today.

It's once data.

Quickly 12 states today, and we look forward to continuing to invest in new States like New York and other states as they open Georgia has a big license licenses that are going to be granted and we look forward to doing some deals in Georgia as well.

For example.

As for demand for capital and I think what we're getting here were getting towards hearing the question is yield compression and potentially a compression on the market. There's no question as I said in my part I think that the big Multistate operators are becoming more competitive and their demand per terms and that's partially because by the way that these big multi state operators.

Our having substantial cash flow and so.

To take.

Grano or a <unk> or a lot of them were clearly for a lot of the different multistate operators that are out there they've really hit through the cash inflection point in terms of generating on generating a lot of cash flow versus their build out stage, which was before and therefore the demand much better terms in terms of the debt debt, providing we still.

Believe that is a great arbitrage between the Canadian listed firms and our ability to source capital in America, and we look forward to providing capital to those large multistate operators.

Great. Thanks very much.

Your next question comes from line of Christopher Nolan with Ladenburg Thalmann.

Hey, guys.

I guess the first question is on the <unk> reserve.

Is there a particular target.

Reserves to loans that youre going to try to keep going forward.

While the seasonal reserve, it's not really a target number that we're looking at we evaluate every loan individually.

We use multiple data points to add.

Inputs into our calculation.

Including things like.

Loss.

Low loss statistics, we have third party model that goes into our calculation our knowledge of the borrowers and.

On whether those loans are current and performing.

And calculate our reserves each quarter based on those inputs.

Yeah.

Okay, great. Thank you.

Okay.

Earlier, you mentioned that from the second quarter distributable EPS will be in excess of the dividend or vice versa.

Sure.

The.

Distributable earnings will be in excess of the dividend.

Great.

And I guess per limb gone how are you how are you thinking more about economic inflation would be on the potential factor in coming months.

How do you think youre going to be positioning.

The company to handle that if at all given that you got no debt.

I think we're well positioned I think we're about half of our loans are floating rate, but half of our loans are fixed rate.

That proportion to continue.

So if you think about if we eventually someday get to one to one leverage and Thats floating were actually and we keep that proportion.

Well hedged against inflation and interest rates.

Great. Thanks for taking my questions and congratulations on your first call.

Thank you.

Your next question comes out of Gerald Pascarelli with Cowen.

Hi, its actually been either on for Jeremy Good morning.

I was hoping you could discuss a little bit kind of the balance between partnering with large scale you buy from us so.

Our operations, there and juxtapose that with the potential for from price deflation in the market seemingly and from my perspective on some of the opportunities that you talked about like Missouri, which was prohibited to Msos should in fact drive more sustainable price inflation in the marketplace, which I would think would be good for you guys as a lender.

So if you can just talk about that dynamic on that.

Thanks.

I think we're looking at two different so we're looking at two different baskets. One basket is the single state or two state operators that we may want to be a big multistate, operator, or ultimately as we are seeing rapid.

Acquiring pipe from please state operators may get acquired and we're seeing the large the large multistate operators on a very acquisitive, but still listed in Canada, which even though they have great market caps, it's not so easy to do equity offerings and so they are using debt and equity and cash.

As a part of those acquisitions as we're watching that happen and we're really we'd like to invest with the top multistate operators, we think the credit worthiness is terrific.

We think that the yields the risk adjusted yields are really strong and as that if that becomes a large proportion of our portfolio. The good news is we can borrow at lesser rates and drop the spread down to our investors. So I'm excited for that business model I think thats more of the business model for 2022 and 2021, but we are in.

Investing some amounts.

On the tariffs on loan for example.

And so we're investing some with the multistate operators this year.

Thank you.

Again, if you'd like to ask a question press star one.

Your next question comes from Brussels Stanley with Beacon Securities.

Good morning, and thanks for taking my question one of one of the higher profile on <unk>.

<unk>.

Last night on the earnings call predicted that.

The Senate majority leaders volume away to Bill May finally be introduced this month and there is talk that that would be prioritized over overseas banking in the Senate just wondering what youre hearing with respect to tumors Bill It's inclusions and how you are preparing for that to your expense you can at this point. Thank you.

I am not yet up to speed to answer the question on.

On on a few there, but I will.

You, probably I understand with tumors initiatives have been and with the canvas Council has been developing we paid attention to it.

Theres been lots of back and forth for example, the safe Banking Act as you've probably noticed doesn't even have a capital markets provision on it and so I think all of these bills should they pass if they have social equity component.

Past because the Senate want to prevent if they don't have a social equity component may pass and it will be most likely will be good for the industry, but.

But they are constantly in flux and so we are paying attention, but every day, we hear a different twist to it.

Understood. Thank you for that.

Alright fair enough. Thanks question on that front.

Turn the call over to Lynn Tenenbaum CEO.

Okay.

Thank you everyone for attending our first quarterly conference call and we look forward to continue to communicate in the future.

This.

Today's conference call. Thank you for participating you may now disconnect.

Oh.

[music].

Yes.

[music].

Good day, and thank you for standing by.

Welcome to the AFC Gamma Q1, 2021 earnings conference call.

At this time all participants are in a listen only mode.

After the Speakers' presentation there'll be a question and answer session to ask a question. During this session you will need to press star one on your telephone please.

Thank you Chelsea good morning, and welcome to the AFC Gamma Inc. First quarter 2021 earnings Conference call I Am joined this morning by Leonard Tannenbaum, Chief Executive Officer, Jonathan Calico head of real estate, Robyn Tanenbaum head of origination and comments Jeffrey Chief Financial Officer.

With our first quarter 2021 earnings release and Investor presentation.

These forward looking statements are subject to the inherent uncertainties in predicting future results and conditions.

Certain factors could cause actual results to differ materially from those projected in these forward looking statements.

New risks and uncertainties arise over time and it is not possible for the company to predict those events or how they may affect it. Therefore, you should not place undue reliance on these forward looking statements.

We ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward looking statements and projections.

The format for todays call is as follows Len will provide introductory remarks, an overview of our results and strategic commentary John will discuss our real estate lending environment Robin will discuss the origination pipeline and Tom will summarize the financials. Then we will open the line for Q&A.

Today I want to provide an overview of FC gamma and the many opportunities that we have in front of us.

First let me share who we are and what we do.

AFC gamma as an institutional provider loans to the cannabis industry structured as a real estate investment trust from.

The loans that we make are typically secured by three pillars cash flow licenses and real estate.

The companies that we lend to our domestic single and multi state operators, which include those that are privately held as well as book listed on the Canadian exchanges.

Since the IPO, we have completed several deals and expanded into a number of new states, including Texas, Missouri, and New Jersey, just some highlights on those three states.

We are really excited about Texas.

Currently only three licenses from the state and given its potential market size. We believe it's going to be one of the largest revenue generating space.

Missouri is a really interesting state given patient growth, but also the fact that the residency requirement makes it difficult from multistate operators to enter.

Which should provide our borrowers an opportunity to make outsized returns.

And you Jersey, which recently legalized adult use cannabis. We believe will also see significant growth in required almost $1 billion buildout.

Our robust pipeline of potential borrowers includes many operators expanding into new states.

We believe that a company loan is preferred over sale leaseback, though we do see both sources of financing being successful given the extremely high demand for capital in the current environment.

Turning to the industry. The cannabis market continues to rapidly evolve and growth I've heard like into dog years, one year on cannabis is equal to seven.

We continue to be excited about the massive opportunities ahead as more states legalize both medicinal and our adult use cannabis.

This dynamic is causing an increased demand for capital to quickly scale meet their license requirements and build a presence in that given state.

Instance, when new Jersey legalized late last year, we estimate the amount of capital needed to build that stayed as close to $1 billion.

And with its bordering state New York recently legalizing adult use we believe that capital Buildout could reach $3 billion to $5 billion, which supports the forecast for New York for 2025 cannabis revenue of over $5 billion.

We believe we are on a one to two year period of consolidation, where the big operators will continue to get bigger.

We remain focused on lending to operators in limited license markets as we believe the licenses in those states of additional value as a form of security.

Additionally, our business contains many barriers to entry, including licensing approval by various state regulatory agencies and states such like such as New Jersey, Ohio, Arizona and Missouri.

Our goal is to be the lender of choice to half of the top 15, multistate operators as well as companies that are seeking to achieve scale or seek to be acquired by a multistate operator.

We lend at different rates to the top msos, the mid size operators and a smaller single state operators, we maintain a high degree of selectivity and stringent lending criteria backed by our three pillars cash flows licenses and real estate.

Turning to our capital structure, we are pleased to be a NASDAQ listed company and have already found that the visibility into our capital structure is a competitive differentiator.

Many borrowers have found that one of the challenges in the industry is finding lenders that can commit to the full amount of capital without having to raise it from a third party.

The IPO has helped us compete for and win deals as our available capital and hold size has greatly expanded.

As we continue to source and evaluate new transactions, we have grown our team and continue to build out our corporate infrastructure.

And as I mentioned, our pipeline remains robust since.

Since January of 2020, we have viewed over $5 billion on transactions and we currently have an actionable pipeline of over $500 million.

As a reminder, the actionable pipeline could take between three and nine months to close upon the transaction.

And many of the deals that we complete our high touch on nature and requires significant due diligence to potentially regulatory approval, making it difficult to predict the exact timing of closings.

We are pleased that our board of directors has declared a quarterly dividend of 38 per share for the June quarter.

We intend to pay a regular quarterly dividends that are covered by our distributable earnings. Additionally.

Additionally, our dividend policy is to pay 90% to 100% of distributable earnings over the year with a special dividend at the end of the year if necessary paid in January of the following year.

Lastly, as a newly listed company, we plan on giving them, having a higher level of communication regarding our progress and outlook this year.

I will now turn it over from our partner John Thanks Lynn as.

AFC G focuses on states that have a limited number of licenses, such as Florida, and Arizona and tends to avoid states like California, Oregon, and Washington with fewer controls on the number of cannabis licenses available.

Since we are structured as a mortgage REIT, we have a lien on the commercial real estate underpinning the loans we're originating.

Our real estate centric approach lending is critical to generating attractive risk adjusted returns in this industry.

However, real estate is only one aspect of the collateral package the other components being the equipment the license on the company's operations.

Before we make a loan we performed rigorous diligence on borrowers and on the real estate to ensure there are no material issues.

We wish to minimize risks that could diminish the borrower's collateral value should the worst case scenario result, and a borrower default on our loan.

It is incumbent upon our team to ensure that each aspect of the property is addressed prior to the origination of the loan.

Permitting environmental issues and zoning all must be vetted ahead of time.

Over to Robin who will speak about the origination process. Thank you John the job of the origination team is to be in the center the industry NCA all deals in the market to understand the lending environment overall market opportunity and state by state dynamics, we have more than 93rd party relationships that we source sales from.

We believe that we are in the center of the candidates ecosystem with deep relationships with many of the companies as a relationship lender, we strive to help great entrepreneurs build their businesses and succeed. We are also proud that two of our portfolio companies and one in our actionable pipeline are led by female Ceos.

As Glenn mentioned from January 2020 through April 32021, we absorbed over 5 billion of transactions, which represents over 285 deals. So how do we structure the loans. It starts with our over $5 billion of loans that we've looked at and narrow those down to over 500.

Million of an actionable pipeline as John outlined is an arduous process, we filter to get to the states. We launch alone and then we closely examine each target companies profile, including cash flow reputation real estate coverage license value and competitive positioning within this day and these initiatives.

Quarters ahead of our deal flow will be an import engaged to monitor performance, we plan to announce each daily close to provide greater transparency and measure our progress to the investment community. When we our lead agents in summary, we are proud of the strong reputation AFC has already built in the industry as an institutional.

Lender and believe our borrowers can feel confident that we are a lender. They can trust when we say we will do something we do it I will now turn it over to Tom to talk about the financials.

Thank you Robyn we ended the first fiscal quarter of 2021 with total assets of $221 5 million as compared to $93 6 million at December 31 2020.

Portfolio investments totaled $97 $2 million of principal outstanding with a carrying value of $92 6 million spread across eight companies as of March 31 2021.

At the end of the March quarter book value per share was $16 18, as compared to $14 83 at the end of the December quarter and increase of nine 1%.

As of March 31, 2021, AFC gamma portfolio consisted of $137 million of transactions with $97 2 million funded.

Following quarter end, we closed an additional $50 million of transactions with $48 3 million funded across seven borrowers.

Currently.

We have completed 165 $6 million of transactions with $133 4 million of funded principal outstanding to 10 companies in 12 states.

All loans in the portfolio are current and performing.

The weighted average portfolio yield to maturity is approximately 23% as of March 31 2021.

Compared to 21, 7% at December 26, 2020, as previously disclosed on the company's formats 11.

For the quarter ended March 31, 2021, we had GAAP net income of $1 4 million or earnings of <unk> 20 per.

Per basic weighted average common share for the three months ended March 31, 2021, we generated a total investment income of $4 7 million and distributable earnings of $3 two.

$2 million or <unk> 45 per basic weighted average common share.

Distributable earnings represents the net income computed in accordance with GAAP, excluding noncash items, such as noncash equity compensation expense.

Unrealized gains or losses.

Provision for current expected credit losses, commonly referred to as seasonal.

Or other noncash items recorded in net income for the period.

Seasonal was early adopted by the company in fiscal year 2020.

As of March 31, 2021, the seasonal reserve represented approximately 125% of loans of carrying value compared to 132% at December 31 2020.

One of the adjustments to arrive at distributable earnings is.

As a onetime noncash stock compensation expense.

A <unk> 22 per basic weighted average common share pursuant to stock option grants effective as of the initial public offering.

Gains.

We believe providing distributable earnings is helpful to stockholders in assessing the overall performance of our business.

As a REIT, we are required to distribute at least 90% of our annual REIT taxable income.

We believe that dividends are generally one of the principal reasons that stockholders invest in our common stock, we generally intend to pay dividends to our stockholders.

And then the amount between 90 and 100% of our taxable income.

On May seven 2021.

The board of directors declared a dividend of <unk> 38.

Per common share outstanding for the June quarter payable on June 32021.

To shareholders of record on June 15th 2021.

Our board of Directors currently believes.

Our distributable earnings in the second quarter will be in excess of our declared dividend and the dividend will represent 75% to 90% of estimated second quarter distributable earnings.

In May 2021, the company amended its secured revolving credit loan agreement to among other things increased the low commitment from $40 million to $50 million.

Decrease the interest rate from 8% to 6% per year.

And extend the maturity date up to December 31, 2021.

Currently no draws on our revolving credit facility of occurred during the fiscal year to date and no interest or fee expense were incurred related to the revolving credit facility. The.

The revolving credit facility is an important component to the companys business strategy to offer greater flexibility manage liquidity and bridges investment commitments through future capital raises.

Thereby potentially reducing the impact of cash drag on the returns to investors.

I will now turn it back over to Lynn.

Thanks, Tom.

Before we move on to COVID-19 Q&A portion of this call I wanted to address the legislative environment, which is an important area of interest for our stakeholders.

Recently, the United States House of Representatives passed the Safe Banking Act for the fourth time.

Which may once again face obstacles passing the Senate.

We believe this piece of legislation will be beneficial to the industry and to AFC gamma.

The safe Banking Act.

May allow for operators to have more banks to deposit their cash flow.

May also allow us the ability for consumers to use credit cards, and dispensaries, where cash is currently the predominant currency.

In relation to FC gamma while it may provide for increased competition from state chartered banks, we believe that it could provide us with more cost efficient capital.

Today AFC Gamma has a strong balance sheet increased access to capital and a best in class team with years of combined lending experience and real estate experience.

We believe that we are daily positioned as a first mover and a rapidly growing market poised to deliver enhanced value for our shareholders I will now turn it back over to the operator to start the Q&A.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby, while we compile the Q&A roster.

Your first question comes from Aaron Hecht with JMP Securities James JMP Securities.

Hi, everyone.

Grafts on holding your first earnings call.

Thanks Erin.

Yeah. So in terms of the committed capital the investing capital.

Sounded like like committed is up around $60 million since the IPO and if I heard correctly $40 million to $50 million.

<unk> been investing.

That sounds like a pretty quick pace that you guys are putting money to work.

Is it reasonable to assume that that pace.

And then once you get the full deployment of.

Of your liquidity how would you.

Frank your options for additional capital.

I'll, let robin answer the first part and I'll take the second part.

Of our actual pipeline of approximately $500 million, we believe that about two thirds of deals will come to fruition. Although as we've stated deals may take three to nine months to close and as candidates is a fast moving industry, it's difficult to predict how and when our pipeline will convert to close deals for instance.

Sales to close deals.

Wanted out too.

The second part of your question Erin.

Difficult to predict when deals close and low quarter. They close them. However, we are constantly monitoring that and and going to match our match our available capital against those.

Those prospects and put them from closings.

We'll continue to monitor that as we closed sales.

Gotcha, and then in terms of.

<unk> you put out the the dividend number.

Distributable earnings guidance range.

What are the factors that can push you towards the low or the high end of that range.

And.

How should people be thinking about.

Potential dividend catch up in the remainder of the year and what are the factors playing into that.

Well I think this is our first quarterly conference call as you pointed out so were still the board I think is still determining how to play out the dividend policy over time, but I think they have determined is that want to pay a dividend substantially below.

On a regular quarterly dividends or <unk>.

The distributable earnings.

Earnings that we have so that's why we have that 75% to 90% range. Obviously, we are only midway through the quarter and the board was comfortable enough to predict the range. What changes that is very simple and I think we mentioned it before it right its timing of deal closings and so.

Gotcha, Thanks, a lot and congrats.

Thank you.

Your next question comes from Owen Bennett with Jefferies.

Good morning, guys hope all well.

Good morning.

Then secondly.

We think demand for capital increasing while at the same time, we've generally seen the cost of capital combing gain are you finding that you're having to offer more favorable terms for new sales now on and if so what sort of delta versus maybe six months ago. Thank you.

Okay.

Two good questions. There is no. We definitely are looking forward to continued geographical diversification I think we're investing 11 states 12 12 state today.

It's once data.

Quickly 12 states today, and we look forward to continuing to invest in new States like New York and <unk>.

Other states as they open Georgia has a big license licenses that are going to be granted and we look forward to doing some deals in Georgia as well.

For example, as for demand for capital and I think what we're getting here were getting towards here on the question as yield compression and potentially a compression on the market. There's no question as I said in my part I think that the big Multistate operators are becoming more competitive and their demand for terms and that's partially because by the way that these.

Big Multistate operators have are having substantial cash flow and so.

To take Toronto, or a <unk> or a lot of them were clearly for a lot of the different multistate operators that are out there they've really hit through the cash inflection point in terms of generating on generating a lot of cash flow versus their build out stage, which was before and therefore, they demand much better terms in terms of that.

Debt, providing we still believe that there is a great arbitrage between the Canadian listed firms and our ability to source capital in America, and we look forward to providing capital to those large multistate operators.

Great. Thanks very much.

Your next question comes from line of Christopher Nolan with Ladenburg Thalmann.

Hey, guys I guess the first question is on the seasonal reserve.

It.

Is there a particular target.

Reserves to loans that youre going to try.

Try to keep going forward.

While the seasonal reserve is it's not really a target number that we're looking at we evaluate every loan individually.

Use multiple data points to as inputs into our calculation, including.

Including things like.

Loss.

Low loss statistics, we have third party model that goes into our calculation our knowledge of the borrowers.

And whether those loans are current and performing.

We calculate our reserves each quarter based on those inputs.

Okay, great. Thank you.

Okay.

Earlier did you mentioned that in the second quarter distributable EPS will be in excess of the dividend or vice versa.

The <unk>.

Distributable earnings would be in excess of the dividend.

Great.

And I guess for limb go on.

How are you how are you thinking more about economic inflation would be on a potential factor in coming months.

How do you think youre going to be positioning.

The company to handle that if at all given that you got no debt.

I think we're well positioned I think we're about half of our loans are floating rate, but half of our loans are fixed rate I expect that proportion to continue.

So if you think about if we.

Eventually someday get to one to one leverage and Thats floating were actually and we keep that proportion.

We're well hedged against inflation and interest rates.

Great. Thanks for taking my questions and congratulations on your first call.

Thank you.

Your next question comes the line of Gerald Pascarelli with Cowen.

Hi, its actually been either on for Jeremy Good morning.

I was hoping you could discuss a little bit kind of the balance between partnering with large scale you buy from it so on.

On your operations, there and juxtapose that with the potential for from price deflation.

The markets seemingly and from my perspective, some of the opportunities that you talked about like Missouri, which is prohibited to msos should in fact drive more sustainable price inflation in the marketplace, which I would think would be good for you guys as a lender.

If you can just talk about that dynamic on that would be helpful. Thanks.

I think we're looking at two different we're looking at two different baskets. One basket is the single state or two state operators that we may want to be a big multistate, operator, or ultimately as we are seeing rapid.

Acquiring patent multistate operators may get acquired and we're seeing the large the large multistate operators.

Acquisitive, but still listed in Canada, which even though they have great market caps, it's not so easy to do equity offerings and so they are using debt and equity and cash.

As a part of those acquisitions as we're watching that happen and we're really we'd like to invest with the top multistate operators, we think the credit worthiness is terrific.

We think that the yields the risk adjusted yields are really strong and as that if that becomes a larger proportion of our portfolio. The good news is we can borrow at less rates and drop the spread down to our investors. So I'm excited for that business model I think thats more of a business model for 2022 and 2021, but.

Were investing some amounts.

We're on the tariffs on loan for example.

And so we're investing some with the multistate operators this year.

Thank you.

Again, if you'd like to ask a question press star one.

Your next question comes from Brussels Stanley with Beacon Securities.

Good morning, and thanks for taking my question one of one of the higher profile Msos.

Last night on the earnings call protected.

Senate majority leaders volume away to Bill May finally be introduced this month and there is talk that that would be prioritized over overseas banking in the Senate just wondering what youre hearing with respect to tumors Bill it's inclusions.

And how are you preparing for that to the extent you can at this point. Thank you.

I'm not yet up to speed to answer the question on.

On a few there but.

It will.

Half of you'll probably I understand with tumors initiatives have been and with the Canada Council has been developing we pay attention to it.

It's been lots of back and forth for example, the safe Banking Act as you've probably noticed doesn't even have a capital markets provision on it and so I think all of these bills should they pass.

<unk> social equity component won't pass because the Senate want to prevent if they don't have a social equity component may pass and it will be most likely will be good for the industry, but.

But they are constantly in flux and so we are paying attention, but every day, we hear a different twist to it.

Understood. Thank you for that.

Alright fair enough. Thanks question on that front.

Turn the call over to Lynn Tenenbaum CEO.

Okay.

Thank you everyone for attending our first quarterly conference call and we look forward to continue to communicate in the future.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q1 2021 AFC Gamma Inc Earnings Call

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