Q4 2024 Advanced Flower Capital Inc Earnings Call
Question and answer session.
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Speaker Change: Please be advised that today's conference is being recorded.
Speaker Change: I would now like to hand, the conference over to Gabriel Katz, Chief Legal Officer. Please go ahead.
Gabriel Katz: Good morning, and thank you all for joining Amc's earnings call for the quarter and fiscal year ended December 31, 2024, I'm joined this morning by Robin Tannenbaum, Our President and Chief Investment Officer, Daniel level, Our Chief Executive Officer, and Brandon Hetzel, Our Chief Financial Officer before we begin I would like to note that this call is being recorded.
Gabriel Katz: Replay information is included in our February 12, 2025 press release and is posted on the Investor Relations portion of <unk> website at advance flower capital Dot com, along with our fourth quarter and fiscal year earnings release, and Investor presentation. Today's conference call includes forward looking statements and projections that reflect the company's current views with respect.
Gabriel Katz: Among other things anticipated market developments portfolio yield.
Gabriel Katz: <unk> financial performance in 2025 and beyond.
These statements are subject to inherent uncertainties and predicting future results. Please refer to <unk>, most recent periodic filings, including including our annual report on Form 10-K filed earlier. This morning with the SEC for certain conditions and significant factors that could cause actual results to differ materially from these forward looking statements and projections.
Gabriel Katz: <unk>.
Gabriel Katz: During this call we will refer to distributable earnings which is a non-GAAP financial measure reconciliations to net income the most comparable GAAP measure to distributable earnings can be found in <unk> earnings release, and Investor presentation are available on <unk> website.
Gabriel Katz: Today's call will begin with Robin providing a high level recap of our 2020 for fiscal year. Dan will then provide an update and overview of our portfolio and an update on the cannabis industry. Finally, Brandon will conclude with a summary of our financial results before we open the lines for Q&A.
Gabriel Katz: With that I will now turn the call over to Robyn, our president and Chief investment Officer.
Robyn: Thanks, Gabe and good morning to all our investors and analysts that have joined US today looking back on 2020 for AFC was extremely active in our first full year with Dan Nevertheless, as our CEO, we laid out three main goals for AFC in the beginning of 2024, one restart the origination engine and close at least 100.
Gabriel Katz: Million of originations too.
Gabriel Katz: Increased portfolio diversification, while enhancing underwriting and three reduce our exposure to underperforming credits through active portfolio management I am pleased to announce that over the course of the year. We made progress on all three initiatives and refocus our efforts solely on candidates with the spinoff of our commercial real estate.
Gabriel Katz: Leo on July nine starting with the originations we set a goal of $100 million of originations for the fiscal year 2024.
Gabriel Katz: And ended the year originating $135 million of new commitments. Since the end of 2024, we have closed $15 million of new commitments and have two signed term sheets, which we expect to close over the coming months.
Gabriel Katz: We continue to see interesting opportunities in the cannabis space as the demand for capital far exceeds the supply as of March 1st 2025, we had an active deal pipeline of over $380 million.
Gabriel Katz: Turning to our underwriting progress process and increasing portfolio diversification. The addition of Dan with his operational background has enabled us to use both a top down and bottoms up underwriting approach on new investments.
Gabriel Katz: We are focused on lending to operators with a track record of executing in the cannabis industry and we have decreased the amount of construction lending in the portfolio. Looking ahead to 2025, we look forward to continuing to diversify the portfolio and loan similar to our recent deals with accomplished operators.
Gabriel Katz: Based on the deals we're seeing today, we currently see a sweet spot in loan sizes between $10 million and $40 million.
Gabriel Katz: Lastly, we have focused our portfolio management efforts on underperforming credits in order to preserve capital. We believe that as we begin to get repaid on some of these underperforming assets and reinvest that capital into performing credits, we may unlock future earnings potential Dan will dive deeper into the portfolio shortly.
Gabriel Katz: But I am pleased that through our portfolio management efforts in 2024.
Gabriel Katz: We received $119 million of Paydowns from five underperforming credits and redeploy that capital across nine new loans to date with that I'll turn it over to Dan who will discuss our fourth quarter performance the cannabis industry and provide an update on our portfolio.
Dan: Thanks, Robin and good morning, everyone.
Dan: I'll begin with an overview of our results followed by some commentary on the industry and an update on our portfolio.
Dan: For the fourth quarter of 2020 for AFC generated distributable earnings of 2019.
Dan: Basic weighted average shares of common stock.
Dan: While we have made significant progress over the last year, reducing our exposure to underperforming credits. There is still work to be done and our earnings in the fourth quarter and through the start of this year were impacted by the underperformance of some of our legacy loans.
Dan: As a result, the board of directors has declared a first quarter dividend of <unk> 23 per share, which will be paid on April 15, 2025 to shareholders of record on March 31 2025.
Dan: We are focused on paying a dividend that is sustainable based on the current performing asset base and believe that the 20 <unk> dividend should be in line or close to our first and second quarter distributable earnings.
Dan: Before turning to the existing portfolio I would like to highlight a recent transaction that we closed.
Dan: And in mid February we committed and funded a $15 million senior secured credit facility to story of Ohio story intends to use the proceeds of this loan to acquire and build out dispensaries in Ohio.
Dan: Our first lien term loan is secured by all of the storage assets in Ohio with its Georgia assets. Initially included as additional collateral.
Dan: This transaction reflects our continued focus on supporting strong operators and attracted limited license states and further diversifying our portfolio.
Robin Tannenbaum: As Robin described earlier, our active pipeline remains strong with over $380 million in deals as of March one 2025.
Robin Tannenbaum: We are focused on sourcing and Bakken operators with a prior track record of success and selectively providing construction financing to operators with existing operations in other states.
We see a growing supply demand imbalance for that capital across the sector with rising demand outpacing an already limited supply.
Robin Tannenbaum: This demand is driven by refinancing activity adult use and medical expansions and increased M&A in the cannabis space given.
Robin Tannenbaum: Given the Republican sweep installed progress on federal reform, we don't see many new capital providers entering the market, providing AFC with an opportunity to continue lending to strong operators at attractive risk adjusted returns.
Robin Tannenbaum: Turning to our current portfolio management efforts.
Robin Tannenbaum: We have continued the liquidation process for private company a.
Robin Tannenbaum: Which recently completed the sale of its Georgia assets for $15 million of net proceeds.
Robin Tannenbaum: We are awaiting approval from the receivership to direct the distribution of these proceeds which should go to pay down the loan.
Robin Tannenbaum: As the borrower monetize additional assets and we received Paydowns from private company.
Robin Tannenbaum: We expect to earn additional revenue redeploying that capital as private company a is on non accrual and any capital received currently goes to principal pay down.
Robin Tannenbaum: Turning to subsidiary of private company G.
Robin Tannenbaum: On a positive note since we entered the forbearance agreement in March 2020 for the borrower has infused additional equity capital and put experienced operators in place of its Pennsylvania, and New Jersey operations.
Robin Tannenbaum: <unk> private company <unk> is also known and operated to Justice grown.
Robin Tannenbaum: However.
Robin Tannenbaum: We have recently uncovered and notified the company of additional defaults under the forbearance agreement.
An additional defaults under its credit facility.
Robin Tannenbaum: In response, the company sued the CRO of the New Jersey operations.
Robin Tannenbaum: With respect to this loan we are secured by the vertical assets in New Jersey, which include an own cultivation facility and three dispensaries two of which are owned.
Robin Tannenbaum: In Pennsylvania, we are secured by three dispensaries and in own cultivation facility, which is currently not operational.
Robin Tannenbaum: Additionally, we have a parent guarantee.
Robin Tannenbaum: And the shareholder guarantee as an added protective measure.
Robin Tannenbaum: We intend to aggressively pursue all rights and remedies, we have under the credit facility and the guarantees to protect and preserve our shareholders' capital.
Robin Tannenbaum: In the complaint against the Euro.
Speaker Change: Justice grown also accused AFC attempting to take the keys.
Speaker Change: While we would not normally comment on baseless accusations I feel the need to address this issue head on given the potential for it to cause significant harm to afcs business.
Speaker Change: Our business is simple.
Speaker Change: We lend money out seeking to earn an attractive risk adjusted return and we expect to be paid back.
Speaker Change: In the history of AFC, we've never sought to enforce a foreclosure outside of a payment event of default.
Speaker Change: When borrowers run into issues, which is not uncommon given the emerging nature of the cannabis industry, we always seek to work with them to find a solution that puts the borrower on more stable footing, while also protecting our shareholders capital.
Speaker Change: We entered into the credit facility with Justice grown in April 2021, and subsequently entered into multiple amendments and to forbearance agreements each of which they material defaulted.
Speaker Change: We are lenders and have no intention of taking the keys and indeed are prohibited from doing so under our legal standing. Additionally.
Speaker Change: Additionally, the multiple amendments and forbearance agreements show, we bent over backwards to avoid auctioning the borrowers assets to the highest third party through foreclosure.
Speaker Change: In short these accusations are baseless and our only focus as being a trusted lending partner to strong operators with a history of success in the cannabis industry.
Speaker Change: While I am disappointed that justice grown is still not on more stable footing, we achieved a number of positive outcomes related to other loans on the portfolio management front in 2024.
We saw a $119 million of capital returns across five underperforming loans last year, including a $4 million exit of our loan to private company, a $22 million Paydown from private company L.
Speaker Change: A $5 million Paydown from private company a.
Speaker Change: A $4 million net paydown from private company B.
Speaker Change: And an $84 million asset of our loan to a subsidiary of a public company H.
Speaker Change: As a reminder, this loan to subsidiary of public company H one into payment default in May 2024, and we received a full paydown of the loan at par, including back interest and default interest only a month later.
While past performance is not indicative of future results, we're no stranger to portfolio management, and we will act aggressively to protect our shareholders' capital.
Speaker Change: As of December 31, 2024, we had $2 24 per share and unrealized losses and seasonal reserves.
During 2024.
Speaker Change: Positions, we exited had seasonal reserves and unrealized losses of 31 per share associated with them by.
Speaker Change: By selling or being repaid on these positions at par to <unk> 31 per share of reserves and unrealized losses were added back to book value.
Speaker Change: We are laser focused on unlocking value from underperforming loans and are excited about the new lending opportunities that we're seeing.
Speaker Change: Now I'll turn it over to Brendan to discuss our financial results in more detail.
Thank you Dan.
Brendan: For the quarter ended December 31, 2024, we generated net interest income of $7 6 million and distributable earnings of $6 3 million or <unk> 29 per basic weighted average common share and had a GAAP net loss of $1 million or <unk> <unk> per basic weighted average common share.
Speaker Change: Yes.
Speaker Change: For the fiscal year ended December 31, 2024, we generated net interest income of $45 7 million and distributable earnings of $34 9 million or $1 68 per basic weighted average common share and had a GAAP net income of $16 8 million or <unk> 78.
Speaker Change: 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 business.
Speaker Change: 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 seasonal.
Speaker Change: Taxable REIT subsidiary income or loss net of dividends and other noncash items recorded in net income or loss for the period.
Speaker Change: We ended the fourth quarter of 2024 with $356 8 million of principal outstanding spread across 16 loans as of March one 2025, our portfolio consisted of $368 8 million of principal outstanding across 17 loans.
Speaker Change: The weighted average portfolio yield to maturity, which is measured for each loan over the life of such loan was approximately 18% as of December 31, 2024 and March one 2025.
Speaker Change: As of December 31, 2024, we had total assets of $402 1 million, including cash and cash equivalents of $103 6 million, which included $100 million drawn on our lines of credit which were both subsequently repaid in full on January 2025.
Speaker Change: As of December 31, 2024, the <unk> reserve was $30 6 million or approximately 10, 4% of our loans at carrying value.
Speaker Change: And we had a total unrealized loss.
<unk> on the balance sheet of $19 7 million for our loans held at fair value.
Speaker Change: As of December 31, 2024, our total shareholder equity was $201 4 million and our book value per share was $9 in <unk>.
Speaker Change: With that I will now turn it back over to the operator to start the Q&A.
Speaker Change: As a reminder, if you'd like to ask a question at this time. 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.
Our first question comes from the line of Aaron Grey with AGP.
Aaron Grey: Hi, good morning, and thank you for the questions here.
Speaker Change:
First question for me just on on Justice grow private company G.
Speaker Change: You guys had done a lot of work to restore that to accrual and had worked out some forbearance agreement. So I imagine a lot. This is still new but just how best to think about some of these next steps look like.
Speaker Change: <unk> talked about in the prepared remarks, everything's kind of still on the table or you guys still looking to.
Speaker Change: Come to a potential new agreement or what are the potential next steps, we should be thinking about.
Speaker Change: Tom I because obviously this is one of the bigger borrowers in the portfolio today, so any incremental color there would be helpful. Thanks.
Tom: Yes, thanks for the question Erin.
Tom: Look we're not going to negotiate in public here and so I think what we as the management team and the board of directors have done is look too.
Tom: <unk> set our dividend at a sustainable level based on the current performing assets within the portfolio.
Tom: And we add some commentary to that and to that effect.
Tom: Just on where we stand today.
Tom: And should we received paydowns and redeploy that capital into productive assets in the future.
Tom: Pretty simple arithmetic and you guys can do your own math on.
Tom: What the income statement will look like if we redeploy that capital into productive assets.
Tom: Okay, great. Thanks for that color there and then.
Tom: Just commentary in terms of the pipeline right. How should we think about the mix of opportunities that you see most appealing you talked about refinancing capex as well as M&A. It turns up for potential new capital deployment for the year. So what are you seeing in terms of near term opportunities and how much of that pipe.
Tom: I might be able to come to fruition for the year.
Tom: Yes.
Tom: We're seeing a lot of interesting opportunities kind of across those broad swath them as opportunities and new medical markets like Kentucky.
Tom: Which we view as an attractive in limited license states that obviously is going to require a significant capital for build out.
Tom: Some of those opportunities are in recently adult use slip states.
Tom: That are.
And the story of Ohio loan that we did would be a great example of that and there is certainly more capital as additional dispensaries and capacity is built to service the Ohio market.
Tom: Other opportunities are refinancing opportunities we're seeing.
Tom: Certainly some exits from the space.
Tom: Some other funds that have operated in this space historically that are not raising new funds are redeploying capital and that is creating a need for.
Tom: For good borrowers with good assets.
Tom: That that could use that capital and then on the flip side we are.
Tom: I've seen not as much on the public side of things, but more on the private side, some significant M&A and often times consideration for any of those M&A transactions is typically.
Tom: Third that a third cash <unk> stock.
Tom: And we are happy to be a provider of M&A and expansion capital to folks that are good operators that are looking to take advantage of some of the distress in this space and scale up their portfolios.
Tom: So it's a mix of all of the above.
Tom: On the redeployment side of things I think at least for the time being given some of the.
Tom: Some of the uncertainty related to the underperforming assets in the portfolio.
Tom: A target for that is going to be partially dependent.
Tom: On how much capital we received back over the course of the year.
Tom: But I would say that.
Tom: Seeing a robust pipeline.
Tom: Good operators with strong credits that fit our profile and.
Tom: Will.
Tom: We will be able to deploy.
Any of the capital that we received back plus the capital that we have available under our current liquidity.
Tom: Into good credits in this space this year.
Tom: Okay, great. Thanks for the color, there and I'll jump back into the queue.
Tom: Yeah.
Speaker Change: Our next question comes from Pablo <unk> with <unk> Associates.
Thank you and good morning, everyone, maybe just to follow up in terms of the outlook for the book for 2025.
Speaker Change: Tom do you go about $100 million of new funding I don't know if you want if you are setting a new target.
Speaker Change: You talked about the $54 million in commitments, so far in 'twenty five how much of a pause.
Speaker Change: Drawn in the in the first quarter, if you can talk about that.
Speaker Change: I can handle about 35 made any maturities this year just trying to understand the yearend Luca.
Speaker Change: <unk> gross with total thank you.
Speaker Change: Yes sure.
So we did.
Speaker Change: With the deployment of our loan to store of Ohio, We did get slightly and to leverage.
Speaker Change: At the start of this year, obviously, we have availability on your.
Speaker Change: The various credit facilities that we have to continue to deploy capital into the space.
Speaker Change: On a target I think that we'll look to probably wait to give that target.
Likely next quarter given that.
Speaker Change: Some of the some of the recent events are a little bit newer here and if so how much we redeployed. This year is one a function of.
Speaker Change: One a function of obviously availability under liquidity, but to a function of how much capital we get back in the timing of getting that capital back.
Speaker Change: I would say that last year.
Speaker Change: We set a target of $100 million, we deployed $125 million of capital I think the opportunities that today is even better than it was six to nine months ago.
Speaker Change: And so we're seeing a good pipeline of borrowers.
Speaker Change: We're able to move up the quality curve.
Speaker Change: On the credit profile is the quality of the operators that states that are exposed to.
Speaker Change: While still earning.
Speaker Change: Still targeting IRR is that are within our historical norms and our targets.
Speaker Change: Right.
Speaker Change: Can you remind us what the liquidity I mean, obviously you have your balance sheet cash flow available and then all those rigs.
Speaker Change: <unk> loans.
Speaker Change: Just a reminder, the mode.
Speaker Change: Sure and you can see it in our investor presentation as well. So we currently have two revolving lines of credit that allow us to borrow up to $100 million.
Speaker Change: As of March one, we had approximately $89 million available under those facilities.
Speaker Change: Alright understood.
Speaker Change: And then just going back to the dividend.
Speaker Change: Obviously, it has to be a number that's sustainable.
Speaker Change: After the spin.
Speaker Change: The total debt.
Speaker Change: So the extra day 91 time dividend or was it that things really change between that announcement on the under 20 pretty extensively about youre doing now.
Speaker Change: Is it just is going to be later I guess, what I'm asking.
Speaker Change: Once you really knew about just as long when you announced the 33%.
Speaker Change: Last quarter. Thank you.
Speaker Change: No.
Speaker Change: These issues are more recent so it's.
The way the forbearance agreement was structured there were.
Speaker Change: Excess cash flow sweeps associated with the cash flow generation of this business.
Speaker Change: And there has been.
Speaker Change: And theres been significant developments as we've entered into the new year here.
So there was nothing.
Speaker Change: Nothing extraordinary about the 33 cents.
And we're looking to that given the uncertainty around this situation as well as some of the paydowns related to private company, a which are.
Speaker Change: Larger loans.
Speaker Change: We wanted to set the dividend at a level that is based on the performing book ask any of the underperforming legacy loans.
Speaker Change: That's good color. Thank you.
Speaker Change: I understand the need.
Speaker Change: Do you want to execute both underperform.
Speaker Change: Underperforming loans and replaced them with stronger operators homebuilding and obviously youre doing there we'd story for example, right. The very strong operate below there, but does that mean that you have been putting the position.
Speaker Change: Dwarf what may be even more competitive rates that you would have had do have <unk>.
Speaker Change: In the past that maybe in this move to swap the quality of portfolio you have.
Speaker Change: And to be more aggressively in all in rate than you would have had in the past.
Speaker Change: I think it's situational based on the credit right.
Speaker Change: Are there some loans that were entering that are very low leverage that amortize quickly that have a great collateral package and great security and for a loan like that it's going to be priced at a little lower cost of capital than a regular way cannabis.
Loan would be priced and there are also loans that are.
Speaker Change: A little bit more development assets I would say in the states that we really like.
Speaker Change: We have exposure to a small construction loan in Georgia.
Speaker Change: One of six licenses in the entirety of Georgia.
Speaker Change: And you have to structure alone like that with appropriate protections in terms of construction reserves interest reserves et cetera.
Speaker Change: Two.
Speaker Change: Two.
Speaker Change: To make sure you have adequate security and protection in the structuring of the loan in a loan like that is going to learn a little bit higher rate than your average cannabis loan. So we are we're.
Speaker Change: We're not just.
Speaker Change: Picking one number.
Speaker Change: And going out what term sheets with that we are this is bespoke credit investing in each one of these companies credits and structures.
Speaker Change: Is its own unique snowflake.
Speaker Change: Alright.
Speaker Change: One more.
Speaker Change: <unk>.
Being lifted you cannot own testing assets. So that's something you have to keep in mind when theirs.
Speaker Change: Receivables being appointed on those type of things, but how would you describe the demand for the assets in New Jersey, and Pennsylvania right now on the one <unk> been able to go rig so it should be strong demand, but there seems to be a lot of distressed assets in that market.
Speaker Change: And the GMC supposedly unexplainable market, but a lot of competition with other new stores right.
Speaker Change: The environment in terms of demand for the assets in those two states.
Speaker Change: Yes, we are.
Speaker Change: Unfortunately, Pablo we're not going to be in a position to comment there I think.
Speaker Change: You all can make your own observations about those markets and the attractiveness of those markets.
Speaker Change: <unk>.
Speaker Change: And I'd leave it at that.
Speaker Change: Okay.
I want to add just one more last one.
Speaker Change: Regarding to HPE.
Speaker Change: In my opinion, whether or not other companies are doing it makes a little sense right. Most companies are finding is normal corporations.
Speaker Change: Growing the tax liability and certain tax benefits and we'll see what happens when you have <unk> right.
Speaker Change: That we have a maturity date in just the total loans. So these could take a while right to you.
Speaker Change: Maybe the argument that these companies are going to be a much better financial shape generating positive cash flow because of the way we are.
Speaker Change: Dealing with Duane.
Speaker Change: I'm just thinking from your perspective do you agree with that view that these companies as a result of <unk>, adding better shape, although it will have a big tax liability finding a better balance sheet.
Speaker Change: Yeah.
There is.
Speaker Change: There is.
Puts and takes.
Speaker Change: Yes.
Speaker Change: Sure.
Speaker Change: Obviously, not not paying your taxes as a choice I wish I had that choice.
Speaker Change: But.
Speaker Change: The old saying.
Speaker Change: There are two certainties in life death, and taxes I think still does apply.
And.
Speaker Change: And Ah.
Speaker Change: Some of these companies I think are not paying taxes, because they can't afford to pay those taxes.
Speaker Change: I also think that.
Speaker Change: Not paying taxes also potentially presents some issues for companies because in certain states.
Speaker Change: You can only due to the regulatory regime and the regulatory overlay you can only do equity transfers that as opposed to asset sales and so on and the equity transfer scenario.
Speaker Change: The taxes attached to that individual asset.
Speaker Change: And <unk>.
Speaker Change: Somebody eventually you have to pay the tax man.
Speaker Change: And so I think there is there is puts and takes we don't really have a strong view one way or another we would love for both the industry and for our borrowers to get 280, where for them over the line I think it's a crime that it's still out there and these companies are paying exorbitant rates.
Speaker Change: But unfortunately I'm not sure of that.
Speaker Change: That's really a high priority item or a focus for the Republican administration.
Speaker Change: Alright, Thank you very much.
That concludes today's question and answer session I'd like to turn the call back to Dan <unk> for closing remarks.
Speaker Change: Thank you so much for joining us today and for the questions.
Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.