AFC Gamma, Inc. (NASDAQ:AFCG), a leading institutional lender to the commercial real estate and cannabis sectors, reported its financial results for the first quarter ended March 31, 2024. The company delivered a strong performance, showcasing its ability to navigate the evolving market landscape and capitalize on emerging opportunities.

For the full year 2023, AFC Gamma reported annual net income of $20.95 million, annual revenue of $69.19 million, annual operating cash flow of $21.23 million, and annual free cash flow of $21.23 million. These robust financial metrics demonstrate the company's consistent execution and its commitment to delivering value for its shareholders.

In the first quarter of 2024, AFC Gamma generated net interest income of $14.8 million and distributable earnings of $10 million, or $0.49 per basic weighted average common share. The company reported a GAAP net loss of $0.1 million, or $0.01 per basic weighted average common share. The difference between distributable earnings and GAAP net loss is primarily attributable to an increase in unrealized losses on loans held at fair value of $3.6 million and an increase in the company's current expected credit loss (CECL) reserve of $4.9 million.

"We are increasingly optimistic about the outlook for the cannabis industry," said Daniel Neville, Chief Executive Officer of AFC Gamma. "The industry has seen expansion fueled by increasing state-by-state legalization and growing consumer acceptance. We continue to see exciting developments at both the state and federal level, which we believe will enhance the cash flow and credit profile for our existing borrowers and expand our pipeline of potential borrowers."

Business Overview

AFC Gamma is an institutional lender that primarily originates, structures, underwrites, invests in, and manages senior secured loans and other types of commercial real estate loans and debt securities, with a specialization in loans to cannabis industry operators in states that have legalized medical and/or adult-use cannabis. The company has recently expanded its investment guidelines to deploy capital in attractive lending opportunities secured by commercial real estate.

The company's portfolio as of March 31, 2024 consisted of 15 loans with a total principal outstanding of $441.2 million. The weighted average portfolio yield to maturity was approximately 20% as of the same date. AFC Gamma's portfolio is diversified across limited license states with attractive supply-demand dynamics, and the company has good exposure to early-stage and expected near-term adult-use transition states.

During the first quarter of 2024, AFC Gamma originated $90 million in new loans, with $34 million allocated to cannabis operators and $56 million to commercial real estate developers. The company's actionable pipeline of cannabis deals stands at $303 million, and the origination team continues to identify attractive investment opportunities.

Spin-off of Commercial Real Estate Portfolio

AFC Gamma also provided an update on the spin-off of its commercial real estate portfolio into an independent, publicly traded REIT, Sunrise Realty Trust, Inc. (SUNS). The spin-off remains on track and is expected to be completed by mid-2024, subject to SEC review and final approval by AFC Gamma's Board of Directors.

"The spin-off of our commercial real estate portfolio will allow both companies to concentrate on their respective portfolios, establish a clear investment thesis, and modify their business strategies to best capitalize on market possibilities within their specializations," said Robyn Tannenbaum, President of AFC Gamma.

Tannenbaum noted that the company is seeing a significant reduction in available capital from traditional commercial real estate lending sources, which, coupled with upcoming debt maturities, presents an opportunity for SUNS to construct a portfolio with attractive risk-adjusted returns. As of May 1, 2024, SUNS's CRE pipeline remains robust, with over $815 million of potential loans.

Portfolio Updates and Risk Management

During the quarter, AFC Gamma successfully exited its loan to Private Company I, which was previously on nonaccrual status. The company sold two-thirds of the loan in June 2023 and was repaid the remaining $3.8 million of principal at par in March 2024, generating an IRR of 24%.

Regarding the loan to Private Company B, which was placed in receivership in October 2023, the company's operations and cash generation have improved under the receiver's management. Private Company B remains current on all interest payments, including default interest, and AFC Gamma is negotiating potential exit opportunities.

The company also provided an update on Subsidiary of Private Company G, which has made progress since the forbearance agreement. The borrower has infused $3 million of additional equity capital and has paid over $2 million in interest. AFC Gamma is also seeing improved performance at the borrower's Pennsylvania and New Jersey operations due to the experienced operators that have been put in place.

However, the company noted that it has taken swift action to preserve the value of its collateral with Subsidiary of Public Company H, which failed to make the April interest payment and was cited for certain defaults, including a breach of minimum cash covenants as of March 31, 2024. AFC Gamma's collateral package includes the business operations across 23 dispensaries and seven cultivation processors, as well as real estate assets in several states.

"When I joined AFC in November, I emphasized my commitment to taking a hands-on approach to address issues at select underperforming portfolio companies," said CEO Daniel Neville. "We have made progress in restructuring some underperforming credits, and we remain optimistic about achieving similar favorable outcomes for our other underperforming loans."

Liquidity and Capital Resources

As of March 31, 2024, AFC Gamma had total assets of $476.4 million, including cash and cash equivalents of $82.3 million. The company had $60 million drawn on its $60 million revolving credit facility, which was subsequently repaid in full on April 1, 2024. The majority of the company's cash is earning interest of approximately 4.5% to 5.3%.

The company's CECL reserve stood at $31.4 million, or approximately 8.7% of its loans at carrying value, as of March 31, 2024, an increase of $4.9 million from the December 31, 2023 reserve of $26.4 million. Additionally, AFC Gamma recorded an increase in unrealized losses on loans at fair value of $3.6 million during the first quarter.

As of March 31, 2024, AFC Gamma's total shareholder equity was $310.6 million, and its book value per share was $15.03. The company paid a dividend of $0.48 per common share on April 15, 2024, to shareholders of record as of March 31, 2024. Year-to-date, AFC Gamma has paid out dividends of approximately 99% of its distributable earnings.

Outlook and Conclusion

AFC Gamma remains optimistic about the outlook for the cannabis industry, citing the continued expansion fueled by increasing state-by-state legalization and growing consumer acceptance. The company is also excited about the opportunities in the commercial real estate lending space, driven by a significant reduction in available capital from traditional lenders.

"We are increasingly optimistic about the outlook for the cannabis industry. The industry has seen expansion fueled by increasing state-by-state legalization and growing consumer acceptance," said CEO Daniel Neville. "We continue to see exciting developments at both the state and federal level, which we believe will enhance the cash flow and credit profile for our existing borrowers and expand our pipeline of potential borrowers."

With a diversified portfolio, a robust origination pipeline, and a focus on active portfolio management, AFC Gamma appears well-positioned to capitalize on the evolving market dynamics and deliver long-term value for its shareholders.