AFC Gamma Inc. Q1 2023 Earnings Call

May 10, 2023

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 speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone you will then hear an automated message advising your hand is raised.

Withdraw your question. Please press star one again.

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.

Good morning, and thank you all for joining <unk> earnings call for the quarter ended March 31, 2023, I'm joined this morning by Leonard Tannenbaum, Our chairman and 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 <unk>.

<unk> in our April 25, 2023 press release and is posted on the Investor Relations section of <unk> website at AFC Gamma Dot com, along with our first quarter earnings release and Investor presentation. Today's conference call includes forward looking statements and projections that reflect the company's current views with respect to among other things.

Future market developments anticipated portfolio yield and financial performance and projections in 2023 and beyond these statements are subject to the inherent uncertainties in predicting future results and conditions. Please refer to <unk>. Most recent periodic filings with the SEC for certain significant factors that could cause actual results to differ materially.

These forward looking statements and projections. During this call we will refer to distributable distributed distributable earnings which is a non-GAAP financial measure reconciliations of non income of net income the most comparable GAAP measure to distributable earnings can be found in <unk> earnings release and Investor.

<unk> available on <unk> website.

The format for todays call is as follows Len will provide introductory remarks, an overview of our first quarter 2023 performance and strategic commentary Brandon will summarize our financial results and we will then open the line for Q&A.

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

Thank you.

Good morning, and welcome to FC Gamma as 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 wanted 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 in over a decade of real estate experience, which will be valuable as we expand our investment strategy to include traditional commercial real estate investments.

Turning to the quarterly results for the first quarter of 2023 FC Gamma generate distributable earnings of <unk> 57 per weighted average share of common stock.

As a reminder, distributable earnings as the primary metric that the board considers when declaring FC Gamma <unk> quarterly dividend. The board of directors declared a <unk> 56 dividend per share for the March quarter, which was in line with the previous three quarters.

Since going public we have generate distributable earnings in excess of our dividend each quarter and paid out $4 10.

Dividends per share.

We are pleased that we have continually out earned our dividend yet we are cognizant that payment and current interest currently makes up a meaningful portion of our earnings.

The majority of the payment of interest earned in the March quarter is due to one loan, which we expect to revert to cash pay beginning in June .

This borrower, which is rated a category four under our <unk> 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 2022, given the market interest rate volatility FC Gamma is taking a conservative view to deploying and managing our capital.

We've raised the bar on originations so on additional equity from borrowers to support their businesses and maintained Apple 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 produce product crossing state lines and Delta eight in hemp product conversions.

I have been improving.

Recent state authorities have been cracking down on legal activities and confiscating illicit products.

On the immediate result of this crackdown on the illicit market has been an increase in distillate prices in many states, such as Michigan, and which we've seen an increase in one liter of distillate pricing from approximately $2000 to $8 with pricing, even higher in Pennsylvania, and New Jersey.

The ryzen distillate prices has also driven a rise in trim prices in flower prices as a consequence of that.

We believe this uptake uptick in pricing should last for at least the next few months and drove higher revenues for cannabis operators.

Despite this positive momentum we are cognizant that large inflows do come online with the October harvest, which may drive prices downward due to increased supply, but we do remain optimistic longer term that prices may have bottomed.

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 1st 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 any given product shortage in the market. We believe we will continue to perform well for the foreseeable future.

Lastly, we are starting to see an uptick in acquisition activity both from both from existing operators buying distressed assets as well as new investors coming into the market to purchase assets at significant discounts to.

The capital formation around these assets is promising and we continue to believe.

That there are several investable states in Canada, including Missouri, Georgia, Maryland, Arizona, and Ohio to name a few.

We believe that our focus on targeting operators in limited license States 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 our first absorbed by the equity before we would be impaired.

We are taking credit reserves with our seasonal reserve currently at five 4% on March 31, 2023 up from 5% as of December 31 2022.

We continue to closely monitor the large loans, we downgraded this category for last quarter.

<unk> project and experiencing increased revenue based on the launch of adult use and of course state, but still has cash flow challenges.

The bar is sponsors contributed significant additional equity and as discussed earlier FC Gamma latter portion of the interest to be paid in kind to assist with some of the cash needs.

The borrowers 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 with <unk> also agreed to add additional real property to our collateral pool and sell that noncore property to pay down the crude pick interest that we incurred.

As stated earlier the bar 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.

<unk> first 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 in preceding years and there's been this discrepancy between bids and offers.

We're 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 debt lenders are demanding to complete deals.

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 complete the transaction.

We are focused on originating loans in the south eastern 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 candidates, becoming more positive as well as the non cannabis real estate opportunities that are beginning to form is regional banks have pulled back from lending.

We believe that AFC gam is well positioned to navigate the current market environment and Opportunistically investing our capital in deals with strong risk adjusted returns I will now turn the call over to Brandon to review our financial results.

Thank you and we are pleased to report strong results in the first quarter of 2023 for the quarter ended March 31, 2023, we had GAAP net income of $10 million or earnings of 49 per basic weighted average common share and generated net interest income of $16 8 million and distributable earnings of $11 6 million or.

<unk> 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 business' distributable earnings represent the net income computed in accordance with GAAP, excluding noncash items, such as stock compensation expense and the unrealized gains or losses provisions for current expected credit losses also known as seasonal taxes.

<unk> REIT subsidiary income or loss net of dividends and other noncash items recorded in net income or loss for the period.

We ended the first quarter of 2023 with $399 million of principal outstanding spread across 12 borrowers subsequent to March 31, 2023, we funded an additional $9 million to subsidiary of public company H <unk>.

As of May one 2023 AC game. Its portfolio consisted of $415 4 million of current commitments with $399 8 million funded across 12 borrowers as of March 31, 2023. The <unk> reserve represents approximately five 4% of our loans at carrying value compared to $4, 97% at <unk>.

<unk> <unk> 31, 2022, we currently have one borrower on non accrual, which represents 0.9% of our portfolio.

The weighted average portfolio yield to maturity, which is measured for each loan over the life of such loans was approximately 21% as of March 31, 2023 and May one 2023 during.

During the first quarter of 2023, we repurchased $10 million and principal amount of our 2027 senior notes at 77, 4% of par value. This resulted in a gain on extinguishment of debt of approximately $2 million.

This gain was partially offset by approximately zero point $7 million in severance expense related to the prior CFO , which was recorded within general and admin expense in the first quarter.

Next let's take a look at our balance sheet, which remains strong as of March 31, 2023, we had total assets of $447 8 million in cash and cash equivalents of $80 6 million. Additionally, we had zero drawn on our line of credit, which provides us of up to $60 million in available funds that we can.

That can be drawn as needed currently the majority of our cash is earning approximately three 5% to four 5% as of March 31, 2023, our total shareholders equity was $337 $9 million and our book value per share was $16 49.

On April 14, 2023, <unk> paid a dividend of <unk> 56 per common share for the first quarter 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% and $100.

Of distributable earnings over the year with that I will now turn it back over to the operator to start the Q&A.

Operator.

Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.

To withdraw your question. Please press star one again.

Please standby, while we compile the Q&A roster.

And again as a reminder, if you would like to ask a question. Please press star one one.

And I am showing no questions from our phone lines at this time I would now like to turn the conference back over to Lynn Tannenbaum CEO for any closing remarks.

Since it is 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.

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

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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 speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone you will then hear and automated message advising your hand is raised to withdraw your question. Please press star one again.

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.

<unk> in our April 25, 2023 press release and is posted on the Investor Relations section of <unk> website at AFC Gamma Dot com, along with our first quarter earnings release and Investor presentation. Today's conference call includes forward looking statements and projections that reflect the companys current views with respect to among other things.

<unk> available on <unk> website.

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

Thank you.

Good morning, and welcome to FC Gamma as 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.

Turning to the quarterly results for the first quarter of 2023, AFC Gamma generate distributable earnings of <unk> 57 per weighted average share of common stock.

As a reminder, distributable earnings as the primary metric that the board considers when declaring FC Gamma <unk> quarterly dividend.

The board of directors declared a <unk> 56 dividend per share for the March quarter, which was in line with the previous three quarters.

Since going public we have generated distributable earnings in excess of our dividend each quarter and paid out $4 10.

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 and Jim.

Should this borrower, which is ready to category four under our seasonal 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 2022, given the market and interest rate volatility FC Gamma is taking a conservative view to deploying and managing our capital.

Until recently cannabis market fundamentals that were challenged due to the oversupply from the illicit market produce product crossing state lines and Delta eight in hemp product conversions.

I have been improving.

Recent state authorities have been cracking down on legal activities and confiscating illicit products. When immediate result of this crackdown on the listed market has been an increase in distillate prices in many states such as Michigan, and which we have seen an increase in one liter distillate pricing from approximately $2000.

So $8 with pricing, even higher in Pennsylvania, and New Jersey.

The ryzen distillate prices has also driven a rise in trim prices in flower prices as a consequence of that.

We believe this uptake in uptick in pricing should last for at least the next few months and drive higher revenues for cannabis operators.

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 1st 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 shortages in the market. We believe will continue to perform well for the foreseeable future.

The capital formation around these assets is promising and we continue to believe.

That there are several investable states in Canada, including Missouri, Georgia, Maryland, Arizona, and Ohio to name a few.

We are taking credit reserves with our seasonal reserve currently at five 4% on March 31, 2023 up from 5% as of December 31 2022.

We continue to closely monitor the large loans, we downgraded as a category for last quarter.

<unk> project and experiencing increased revenue based on the launch of adult use and of course state, but still has cash flow challenges.

The virus sponsors contributed significant additional equity and as discussed earlier AFC gamut latter portion of the interest to be paid in kind to assist with some of the cash needs.

In conjunction the bar also agreed to add additional real property to our collateral pool and sell that noncore property to pay down the crude pick interest that we incurred.

As stated earlier the bar 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 first 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 in preceding years and thats 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.

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 complete the transaction.

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.

Looking ahead I am excited about the trends in cannabis, becoming more positive as well as the non candidates real estate opportunities that are beginning to form is regional banks have pulled back from lending.

We believe that AFC gamma is well positioned to navigate the current market environment and Opportunistically investing our capital in deals with strong risk adjusted returns I will now turn the call over to Brandon to review our financial results. Thank.

Thank you Lynn we are pleased to report strong results in the first quarter of 2023 for the quarter ended March 31, 2023, we had GAAP net income of $10 million or earnings up <unk> 49 per basic weighted average common share and generated net interest income of $16 8 million and distributable earnings of $11 6 million or <unk>.

<unk> seven 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 business' distributable earnings represent the net income computed in accordance with GAAP, excluding noncash items, such as stock compensation expense any unrealized gains or losses provisions for current expected credit losses also known as seasonal taxes.

REIT subsidiary income or loss net of dividends and other noncash items recorded in net income or loss for the period.

We ended the first quarter of 2023 with $399 million of principal outstanding spread across 12 borrowers.

Sequencers March 31, 2023, we funded an additional $9 million to subsidiary of public company H <unk>.

As of May one 2023 AC games portfolio consisted of $415 4 million of current commitments with $399 8 million funded across 12 borrowers as of March 31, 2023. The <unk> reserve represents approximately five 4% of our loans at carrying value compared to $4, 97% at <unk>.

<unk> 31, 2022, we currently have one borrower on non accrual, which represents 0.9% of our portfolio.

The weighted average portfolio yield to maturity, which is measured for each loan over the life of such loans was approximately 21% as of March 31, 2023 and May one 2023 during.

This gain was partially offset by approximately zero point $7 million in severance expense related to the prior CFO , which was recorded within general and admin expense in the first quarter.

It can be drawn as needed currently the majority of our cash is earning approximately three 5% to four 5% as of March 31, 2023, our total shareholders equity was $337 $9 million and our book value per share was $16 49.

On April 14, 2023 FC Gamma paid a dividend of <unk> 56 per common share for the first quarter 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% and $100.

Sent of distributable earnings over the year with that I will now turn it back over to the operator to start the Q&A.

Operator.

Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.

To withdraw your question. Please press star one again.

Please standby, while we compile the Q&A roster.

And again as a reminder, if you would like to ask a question. Please press star one one.

And I am showing no questions from our phone lines at this time I would now like to turn the conference back over to Lynn Tannenbaum CEO for any closing remarks.

Since I did such a good job describing everything I guess theres no questions today, so I want to thank everyone.

For being on the call and look forward to reporting next quarter.

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

AFC Gamma Inc. Q1 2023 Earnings Call

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