Q3 2023 AFC Gamma Inc Earnings Call

November 8, 2023

Okay.

Good day and welcome to the SB Kim of Q3 2023 earnings call.

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

Later, we will conduct a question answer session and instructions will be given at that time.

As a reminder, this call's being recorded.

I would like to turn the call over to Gabriel Katz, Chief Legal Officer, you may begin.

Good morning, and thank you all for joining <unk> earnings call for the quarter ended September 32023.

This morning by Leonard Tannenbaum, our Chief Executive Officer, Brandon <unk>, 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 October 18, 2023 press release and is posted on the Investor Relations section of <unk> website at AFC Gamma Dot com, along with our third 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 anticipated market developments and financial performance in 2023 and beyond these statements are subject to inherent uncertainties and predicting future results and conditions. Please refer to <unk> most.

<unk> 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 also refer to distributable earnings which is a non-GAAP financial measure.

Conciliations of net income the most comparable GAAP measure to distributable earnings can be found in <unk> earnings release, and Investor presentation available on <unk> website.

The format for todays call is as follows Len will provide introductory remarks, an overview of our third 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 you good morning, and welcome to <unk> earnings call for the quarter ended September 32023, I would like to thank everyone for joining us today to discuss our results.

Before turning to the quarterly results. We are very excited and I am personally excited to announce the appointment of Dan novel, The New Chief Executive Officer of FC Gamma effective this coming Monday.

As Dan joins us in this new role I will transition from chairman of the Board and Chief Executive Officer to Executive Chairman of the Board and Chief Investment Officer.

Dan joins us from ascend wellness holdings, a leading multistate vertically integrated cannabis operator, where he has held various roles, including interim CEO and more most recently as chief Financial Officer.

Dan joined US and is one of its first employees and he was instrumental in helping grow the company to an operator with seven states 2000, plus employees and over $500 million revenue.

Dan's expertise in cannabis operations M&A activity and deal structuring uniquely positions him to lead FC Gamma as CEO.

We have noticed that as a lender it has become increasingly important to have in house operating expertise to contribute to the underwriting and portfolio management of canvas credits.

Therefore dance operating and M&A expertise combined with my 25 years of direct lending experience physician FC Gamma to continue as a leading debt provider in the cannabis industry.

We are very excited to have Dan join us as the team and I have worked closely with him on a number of matters. When he was at a cent.

For example, we had the opportunity to witness dance expertise firsthand as he led a sense acquisition of certain assets of two of our portfolio companies.

We've also been in frequent communication about the industry and investment opportunities with him over the years.

We look forward to working with him to continue building FC Gamma as we enter the next phase of the cannabis industry.

The appointment of Dan as CEO, reaffirms AFC gamut commitments to lending to the cannabis industry.

As we have discussed on a quarterly basis over the last year, we are increasingly seeing candidates three dot our operators emerge and we are excited to deploy capital and expand <unk> platform as operators have a difficult time accessing the capital markets.

I believe <unk> is uniquely positioned to capitalize on the opportunity to provide capital to existing borrowers and new well capitalized operators that are looking to build and our expand by buying distressed assets or assets at a significant discount.

Turning to the quarterly results for the third quarter of 2023, AMC Gamma generate distributable earnings of 49 cents per basic 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> 48 dividend per share in the September quarter.

Since going public we have generate distributable earnings that have met or exceeded our dividend each quarter and paid out $5 in <unk> and dividends per share.

In June of this year management stated that we anticipated a <unk> 48 dividend represented a sustainable dividend level on a court current portfolio for 2023, assuming no significant non accruals and without any additional investments.

Despite our investment in private company CEB put on non accrual for a period of time, we continue to believe that this is true.

For the remainder of 2023.

Since mid 2022, given the volatility in the cannabis market, we became increasingly select increasingly selective on these new investments and maintained ample cash to capitalize on opportunities that may arise.

We are excited about the new opportunities, we are seeing driven by an uptick in acquisition activity both from existing operators buying distressed assets as well as new investors coming into the market to purchase assets at a significant discount.

The capital formation around these assets is promising and we are focused on well capitalized operators and attractive states, such as Missouri, Georgia, Maryland, Arizona, and Ohio to name a few.

Following our thesis during the quarter, we funded a new cannabis investment to private company M of approximately $25 million into one of the new newly formed well capitalized operators that we believe will continue to consolidate valuable key asset valuable assets in key limited license states.

We continue to have liquidity to make additional investments in operators in limited license states that we believe have strong risk adjusted profiles.

Additionally, we are pleased to see that the ballot initiative to introduce adult eastern Ohio passed yesterday, which we believe will be a large positive for operators in the state.

AMC Yammer has exposure to Ohio through two of our larger credit facilities, including our $84 million commitment is subsidiary of public company, each and a $63 million commitment to private company L.

We believe both operators should materially benefit.

From Ohio, moving to a recreational model.

As we are focused on active portfolio management to borrowers have been placed into receivership to optimize operations and maximize value for the benefit of the creditors.

One of the borrowers private company.

Has been actively liquidating certain assets and has so far paid down over $48 million in principal to FC Gamma and Syndicate partners.

Of which $27 million was received during the quarter.

Primarily from the sale of its Maryland, and Arizona operations.

As we've discussed during the last several quarters subsidiary of private company G, which we closely continue to closely monitor continues to have cash flow challenges as it completes a very valuable construction project in New Jersey.

As we stated last quarter, we put subsidiary of private company <unk> on non accrual for the month of June.

As we did not receive interest payments in July and August the bar remains on non accrual for those two months.

To ensure the borrower has adequate working capital in New Jersey, we have modified interest payments for the remainder of the year after.

<unk> has received its portion of the $800000 in cash interest that was due for the month of September.

And the $1 million of cash interest that was due in the month of October.

And $1 million in cash interest is due in November and December.

As it relates to this loan we are currently not accruing any interest in to income that has not been paid in cash.

We continue to remain to remain excited about the near term prospects in New Jersey, and look forward to the full optimization of their cultivation facility.

As I have previously discussed we have recently focused on reducing payment in kind interest as a component of our income.

During the first quarter of 2023, pik or payment in kind as a percentage of income was 25%, but now for the quarter ended September 32023 with.

We have decreased that level to a much more normal normalized level of 10%.

We are pleased about the significant decrease in tech, which is mainly due to our active management.

As we have said in past calls we believe there are credible new cannabis operators entering the market that are well capitalized to take advantage of the current market environment.

We are also pleased to have Dan join us and look forward to introducing him to our analysts and investors in the coming months.

I will now turn the call over to Brandon to review our financial results.

Thank you Lynn for the quarter ended September 32023, we had GAAP net income of $8 million or earnings of 39 per basic weighted average common share and generated net interest income of $15 3 million and distributable earnings of $9 9 million or <unk> 49 per basic weighted average common share.

As previously mentioned, we believe providing distributable earnings is helpful to shareholders in assessing the overall performance of AFC games business distributable earnings represents the net income computed in accordance with GAAP, excluding noncash items, such as stock compensation expense and the unrealized gains or losses provision for current expected credit losses also known as <unk>.

As seasonal.

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

We ended the third quarter of 2023 with $397 8 million of principal outstanding spread across 12 borrowers subsequent to September 30 of 2023, we received select principal prepayments of debt relating to private company <unk> of $1 7 million.

As of November three 2023, <unk> had $395 1 million of principal outstanding across 12 borrowers.

As of September 32023, the seasonal reserve represents approximately four 7% of our loans at carrying value consistent with four 7% as of June 32023.

The weighted average portfolio yield to maturity, which is measured for each loan over the life of such loan was approximately 19% as of September 32023, and November three 2023.

Next let's take a look at our balance sheet, which remains strong as of September 32023, we had total assets of $445 1 million in cash and cash equivalents of $73 2 million. Additionally, we had zero drawn on our line of credit, which provides us up to $60 million in available funds that can be drawn as needed.

Currently the majority of our cash is earning interest of approximately four 5% to five 4%.

As of September 30 of 2023, our total shareholder equity was $338 8 million and our book value per share was $16 56.

On October 13, 2023 FC Gamma paid a dividend of <unk> 48 per common share for the third quarter to shareholders of record as of September 32023.

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.

Yes.

Thank you if you'd like to ask a question. Please press star one one.

Your question has been answered and you'd like to remove yourself from the queue. Please press star one again.

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

Great. Thanks for taking the questions fueled by May 1st could you provide a bit of color on why now was the time to make the CEO change and perhaps a part of that how we should think about the strategy moving forward, particularly as it relates to commercial real estate.

Okay.

I guess, let's start with the CEO change.

I'm really pleased to get than when Robin.

Literally each other.

When we got buried in portfolio management as we've talked about on these calls and actually I'm really knock on wood happy about the way things are turning out and turning the corner as a company. So I'm really pleased.

With having turned the corner, having said that I think I forgot after I've done this for 20 years in direct lending how much time portfolio managements hasn't.

Really it's as strong and heavy lift and Dan is an absolute expert in that so we said who is the one person that we really wanted this industry of course, excluding the founders who are also very good.

Not available and we came upon only one name which was Dan and.

This is a person that we frequently call kind of so so excited when he wanted to come and so I think he will be extremely added and already has been additive in terms of talking directly to our sponsors talking directly to our deal partners. We help a lot of our sponsors monetize many of their assets.

At our noncore assets or even core assets in order to reduce debt or streamline their portfolio and Dan is truly an expert.

In that category. So we're really pleased it's a skill set that while I have some of he is far better than I am and so it's great to replace yourself.

In this role and I'm still there is executive chairman and Chief Chief Investment Officer, that's great to replace the role with someone as good as he is.

To your second question, we have not yet closed real estate is still an open.

The ability for the company to do up to 35% of our assets in real estate, we do have a ton of undrawn capital and liquidity and due to our successful portfolio management, we're getting back more capital. So I expect going forward, we're hopeful to get both cannabis firing and we did close one deal in <unk>.

And real estate firing and so we have the company firing on all cylinders to get deployed.

Got it then just building on that as a follow up if I take a look at the disclosures around the pipeline or the active pipeline I noticed that the candidate pipeline increased quite notably in commercial real estate pipeline decrease just wondering particularly on the commercial real estate side. If you could just talk about some of the.

Dynamic evolution of the market that you've seen and how youre the perceived market opportunity for AFC Gan has evolved in that please.

Hi, This is robin on the cannabis side I think we have reinvigorated our origination effort as we've seen more III data out players as Len discussed enter the market and there's been an uptick in acquisition activity by those players, which is why you've seen the candidate pipeline increase on the <unk>.

<unk> real estate side.

I think that as <unk>.

We are positioning <unk> tomorrow, but as Marvin syndicate partner on that side, where we're not necessarily going to be leading transactions, but we do see opportunities in the commercial real estate sector, where we can leverage other's expertise to be a co lender in those situations. So that's why you've seen that pipeline decrease a little bit.

And I think Thats why youre getting the balance this quarter.

Got it and.

<unk> for me.

And then could you just give us a sense of what to expect at your analyst day in December and as part of that is there an expectation for like a long term financial outlook any color. There in terms of setting expectations would be helpful. Thank you.

Oh come on you have to have a surprise otherwise.

Yeah.

Sure.

Previewing it a little bit with my Board Hoover meeting over the next the next two days and introducing the board to Dan I think that has to happen first and let Dan get his feet wet and I think you should expect that.

To present.

For analyst day, and four therefore, all of our investors.

His vision in terms of the cannabis industry, where we see opportunities and how we're going to approach it differently.

And and I think thats pretty exciting.

Awesome, Thanks for the color.

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

Good morning, guys. Thanks, very much for taking my questions.

You talked about the recent I think it was the election of Ohio, but I'm wondering is there any anything at the federal or any other state from a regulatory perspective that.

Opens up a market or provides a change in the opportunity for you guys.

Three states that everybody's watching its Ohio, Pennsylvania and Florida.

<unk> lawsuits today or yesterday, I forget, which one so let's watch to see how that lawsuit goes where the governors challenging my guidance and it's just in my personal opinion.

As in any good information on that but I don't think I don't think Florida goes rack.

But you never know.

At least at least I think the governor's too far against debt and there's four different.

Wordings that he's challenging if any one of the Wordings fails I think it doesn't go through.

From my understanding.

We will see but not right now youll see tomorrow.

From Ohio standpoint look I was hoping you would passed with over 60% of it passed with approximately 57%.

The state Senate is going to go against it potentially I think the there is some good threats of bringing this up next year in the election year, which is not where the Republicans want it to be so my hope is that they just leave us alone here the will of the people at 57%.

I could be mistaken, but it seemed like it past the candidates passed with even a slightly higher percentage than the abortion.

Pulling so.

<unk>.

<unk> or bill or whatever whatever one important devote so I think thats really positive for the cannabis industry in Ohio, that's going to really help a number of operators, including a lot of our credits that are there.

And the last one is Pennsylvania, probably Pennsylvania as EBIT, Pennsylvania passes.

Pennsylvania takes a long time to do anything remember. This is this is the state where you buy your liquor and a state controlled liquor store. So it's just a different state altogether.

Okay. That's helpful.

The second question is I mean, you would be.

Things have changed a little bit like youre underwriting for for kind of survivors are consolidators in the cannabis side. It looks like you're doing some specialty focus on real commercial real estate opportunities.

How have you changed the underwriting and investment approval process given that the scope has changed a little bit.

So we've added to our investment approval process, which has to remain.

And which I am still chief investment Officer, we have four people now on committee, we added a very skilled player to.

To the committee, which we needed.

We said we have two in receivership and this and that so we're really happy to have Bernie Berman joined that committee.

Very very skilled in this area and.

We are happy to have them and then Dan will be added after he joined US on Monday to investment Committee, which so it will expand.

Really necessary to have more skill sets on investment committee and thinking through these opportunities.

From a general standpoint, if you just think about it the new players are buying things at pennies on the dollars not pennies really 50 cents on the dollar.

Cannabis operators in general have built these cabot.

Cabot's facilities and dispensaries at 100 or more than 100 due to delays.

Any delays in construction delays and so if you think about that competitive advantage also of not having sale leasebacks that have now escalated into the 15% range in some cases.

Debt loads that are adequate control.

Some cases, including debt costs, which are in the mid to high double digits, even for the largest msos.

And you could see them trading.

This is that this is a real competitive advantage for the new well capitalized companies and we feel very comfortable that there have not only competitive advantage in terms of capital, but many of these are run by really good operators that have learned.

Through the business and so were excited to back them and in fact their growth.

Great. Thank you very much.

Thank you our next question.

It comes from Mark Smith with Lake Street. Your line is open.

Hi, guys.

Let me just give us a good update on some of the new states and things that you're watching could you just give us a quick update on states, where you are today.

Any of that maybe you're seeing some signs of improvement or any of that maybe haven't bottomed yet.

Lower.

Look I think all states.

We thank God, all states have bottomed, but bottomed at really bad levels in terms of California, Oregon, Washington, Colorado, and a lot of Michigan. The unlimited license states have gotten.

Or have has gotten your per pound price below market cost of production. So those non vertically integrated operators have really gotten killed and thats part of the real problem.

<unk>.

If your marginal cost of production.

Prices below that you just want to buy for your dispensary and capture margin.

So in Arizona.

Example of that you've seen that in Michigan for sure have.

<unk> contrast, with that is high and our high end brands are well regarded brands like the one that we back in Michigan.

Even though it's.

It's had its challenges.

Our interest and cash, they're making very good cash flow and that's in a very tough state and why is that because the product is very well regarded and so there are pockets of bright bright light even in the unlimited license states.

And Thats, our only one but we're pretty happy about the way it's performing.

There are cannabis operators for example, our credit and Pennsylvania that generate so much cash that we have cashflow sweeps every quarter and our loan has been paid down significantly almost in half Brandon.

Little less than half.

And so we expect to be fully paid on that loan if should we not convinced them to do a dividend recap or something else by next year, if it's because they're performing so well and generating so much cash flow.

That's alone for example that we have an exit fee at the end of that loan.

And if when they fully pay off alone we expect to get paid that exit fee and so we should have a benefit next year from that so it's not like all loans are batter alone. So good Orleans, one state or battered wanted to say it is really company specific company operations. The way they are constructed and their market positioning.

Perfect.

Any updated thoughts as you look at the portfolio and where you want to be.

Fixed versus variable rates.

I think it is not important anymore and look I've managed.

Portfolios, including a $5 5 billion asset manager before I, Sylvia to Oaktree and and you always wanted to be in variable rates. When rates are rising you want to be in fixed rates when rates are dropping I think this whole concept of being more in variable rates today is not important.

I think you want to be.

Personally I would rather be fixed and floating today at this moment I think the federal reserve in general is either stop raising interest rates are which are within a half a point of the stop in raising interest rates I think the inverted yield curve will reverse next year.

I think this is a good time to have more fixed rate and floating rate.

I know that thats been exciting and we've actually done a really good job, having more floating rate and benefited from it.

If I were doing new loan today I much rather have effects.

Great. Thank you.

Thank you there are no further questions at this time I'd like to turn the call back over to Linda <unk> for closing remarks.

Thank you all for attending.

It was mentioned on the call we look forward as Dan takes over.

CEO slot to providing more information about his vision.

And our new our new very strong push into canvas. So thank you very much.

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

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Good day and welcome to the Asti game of Q3 2023 earnings call. At this time, all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions will be given at that time.

As a reminder, this call's being recorded.

I would like to turn the call over to Gabriel Katz, Chief Legal Officer, you may begin.

Good morning, and thank you all for joining FC Gamma as earnings call for the quarter ended September 32023, 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 October 18, 2023 press release and is posted on the Investor Relations section of <unk> website at AFC Gamma Dot com, along with our third quarter earnings release and Investor presentation.

These statements are subject to inherent uncertainties and 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 from these forward looking statements and projections. During this call. We will also refer to distributable.

<unk>, which is a non-GAAP financial measure.

Reconciliations of net income the most comparable GAAP measure to distributable earnings can be found in <unk> earnings release, and Investor presentation available on <unk> website.

The format for todays call is as follows.

Len will provide introductory remarks, an overview of our third 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.

Good morning, and welcome to <unk> earnings call for the quarter ended September 32023, I would like to thank everyone for joining us today to discuss our results.

Before turning to the quarterly results. We are very excited and I am personally excited to announce the appointment of Dan level, the new Chief Executive Officer of FC Gamma effective this coming Monday.

As Dan joins us in this new role I will transition from chairman of the Board and Chief Executive Officer to Executive Chairman of the Board and Chief Investment Officer.

Dan joined US and is one of its first employees and he was instrumental in helping grow the company to an operator with seven states 2000, plus employees and over $500 million revenue.

<unk> expertise in cannabis operations M&A activity and deal structuring uniquely positions him to lead FC Gamma as CEO.

We have noticed that as a lender it has become increasingly important to have in house operating expertise to contribute to the underwriting and portfolio management of candidates credits.

Therefore dense operating and M&A expertise combined with my 25 years of direct lending experience positioned FC gamma to continue as a leading debt provider in the cannabis industry.

We are very excited to have Dan join us as the team and I have worked closely with him on a number of matters. When he was at a scent.

For example, we had the opportunity to witness dance expertise firsthand as he led a sense acquisition of certain assets of two of our portfolio companies.

<unk> also been in frequent communication about the industry and investment opportunities with him over the years.

We look forward to working with him to continue building FC Gamma as we enter the next phase of the cannabis industry.

The appointment of Dan as CEO, reaffirms AFC gamut commitment to lending to the cannabis industry.

As we have discussed on a quarterly basis over the last year. We are increasingly seeing candidates three dot O operators emerge and we are excited to deploy capital and expand the <unk> platform as operators have a difficult time accessing the capital markets.

Turning to the quarterly results for the third quarter of 2023, AMC Gamma generate distributable earnings of 49 per basic 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> 48 dividend per share of the September quarter.

Since going public we have generated distributable earnings that have met or exceeded our dividend each quarter and paid out $5 in <unk> and dividends per share.

In June of this year management stated that we anticipated a <unk> 48 dividend represented a sustainable dividend level on a court current portfolio for 2023.

Assuming no significant non accruals and without any additional investments.

Despite our investment in private company CEB put on non accrual for a period of time, we continue to believe that this is true.

For the remainder of 2023.

The capital formation around these assets is promising and we are focused on well capitalized operators and attractive states, such as Missouri, Georgia, Maryland, Arizona, and Ohio to name a few.

Following our thesis during the quarter, we funded a new candidates investment to private company M of approximately $25 million into one of the new newly formed well capitalized operators that we believe will continue to consolidate valuable key asset valuable assets in key limited license states.

We continue to have liquidity to make additional investments in operators and limited license states that we believe have strong risk adjusted profiles.

Additionally, we are pleased to see that the ballot initiative to introduce adult eastern Ohio passed yesterday, which we believe will be a large positive for operators in the state.

AMC Yammer has exposure to Ohio through two of our larger credit facilities, including our $84 million commitment to subsidiary of public company, each and a $63 million commitment to private company L.

We believe both operators should materially benefit.

From Ohio, moving to a recreational model.

As we are focused on active portfolio management to borrowers have been placed into receivership to optimize operations and maximize value for the benefit of the creditors.

One of the borrowers private company.

Has been actively liquidating certain assets and has so far paid down over $48 million in principal to FC Gamma and Syndicate partners.

Of which 27 million was received during the quarter.

Primarily from the sale of its Maryland, and Arizona operations.

As we stated last quarter, we put subsidiary of private company <unk> on non accrual for the month of June.

As we did not receive interest payments in July and August the bar remains on non accrual for those two months.

To ensure the borrower has adequate working capital in New Jersey, we have modified interest payments for the remainder of the year.