Advanced Flower Capital Inc. (AFCG) has established itself as a leading institutional lender in the rapidly evolving cannabis industry. The company's unwavering commitment to providing flexible, secure financing solutions has positioned it as a trailblazer in this dynamic market.

Company Background

Founded in July 2020, Advanced Flower Capital was born out of a veteran team of investment professionals who recognized the immense potential within the cannabis sector. The company, initially known as AFC Gamma, Inc., primarily focuses on originating, structuring, underwriting, investing in, and managing senior secured loans and other types of debt securities for cannabis industry operators in states that have legalized medical and/or adult-use cannabis. In March 2021, the company completed its initial public offering, becoming a publicly traded company listed on the Nasdaq stock exchange. Notably, prior to the IPO, in July 2020, the company commenced operations by purchasing its initial portfolio of loans from an affiliated entity at fair value.

Loan Portfolio

As of September 30, 2024, Advanced Flower Capital's loan portfolio stood at $298.7 million, spread across 13 borrowers. The weighted average yield to maturity on these loans was an impressive 18%, reflecting the company's ability to underwrite high-quality credits and deliver attractive risk-adjusted returns to its shareholders. Notably, 90% of the portfolio was either fixed-rate or had SOFR floors of 4.5% or higher, positioning the company well to navigate a rising interest rate environment.

The loan portfolio consists of:

1. Loans Held for Investment at Fair Value: One loan with an aggregate originated commitment of approximately $85.3 million and outstanding principal of $53.8 million.

2. Loans Held for Investment at Carrying Value: Eleven loans with an aggregate originated commitment of approximately $260.2 million and outstanding principal of $242.8 million.

3. Loan Receivable Held at Carrying Value: One loan with an originated commitment of $4.0 million and outstanding principal of $2.0 million.

Financials

The company's third-quarter 2024 financial results underscored its operational excellence. Advanced Flower Capital reported GAAP net income of $1.4 million, or $0.06 per basic weighted average common share, and Distributable Earnings of $7.2 million, or $0.35 per basic weighted average common share. This performance enabled the company to pay a $0.33 per share dividend to shareholders, further demonstrating its commitment to delivering value.

For the fiscal year 2023, Advanced Flower Capital reported revenue of $54.32 million, net income of $20.95 million, operating cash flow of $21.23 million, and free cash flow of $21.23 million.

In the most recent quarter (Q3 2024), the company reported revenue of $10.46 million, net income of $1.38 million, operating cash flow of -$627,895, and free cash flow of -$627,896. Compared to Q3 2023, revenue decreased 37.8% driven by lower interest income related to loans on nonaccrual status and lower capital deployed, partially offset by higher fee income and OID income. Net income decreased due to lower interest income and an increase in unrealized losses on loans at fair value, partially offset by lower management fees, incentive fees, and provision for CECL.

The company uses key financial metrics such as Distributable Earnings, book value per share, and dividends declared per share to evaluate its performance. As a REIT, Advanced Flower Capital is required to distribute at least 90% of its annual REIT taxable income to shareholders.

Strategic Transactions

One of the key drivers behind Advanced Flower Capital's success has been its disciplined approach to loan origination and portfolio management. During the third quarter, the company closed several strategic transactions, including an $11 million senior secured credit facility for Private Company Q, a vertically integrated operator in Georgia, and expansions of existing senior secured facilities to the tune of $7.3 million. These deals underscored the company's ability to partner with high-quality borrowers and support their growth trajectories.

Market Positioning

The cannabis industry's capital needs continue to evolve, and Advanced Flower Capital has positioned itself as a trusted financing partner. With a robust pipeline of over $400 million in potential deals as of November 1, 2024, the company is poised to capitalize on the growing demand for debt capital within the sector. The recent Republican sweep in the midterm elections, while potentially slowing the pace of federal cannabis reform, has also created an environment where Advanced Flower Capital's specialized expertise and flexible financing solutions are in high demand.

Operational Achievements

Operationally, the company has made significant strides under the leadership of CEO Daniel Neville, who joined in late 2023. Neville and his team have successfully navigated a challenging market landscape, exiting, restructuring, or securing substantial paydowns on seven key loans, totaling approximately $150 million in capital repayment. This disciplined approach has enabled the redeployment of capital into new vintage deals with attractive risk-adjusted returns.

Strategic Restructuring

Furthermore, Advanced Flower Capital's spin-off of its commercial real estate portfolio in July 2024 has allowed the company to operate as a pure-play cannabis lender, sharpening its focus and aligning its resources to capitalize on the immense opportunities within the industry.

Future Outlook

Looking ahead, Advanced Flower Capital's growth trajectory remains promising. The company's ability to raise capital accretively through its At-the-Market (ATM) program has bolstered its financial flexibility, empowering it to provide timely, flexible financing to cannabis operators in need. With a seasoned management team, a diverse loan portfolio, and a steadfast commitment to responsible lending practices, Advanced Flower Capital is well-positioned to navigate the evolving cannabis landscape and continue delivering long-term value to its shareholders.

The company set an ambitious goal of $100 million in loan originations for 2024 and exceeded this target, achieving $116 million in new originations across 7 deals so far. Advanced Flower Capital has generated distributable earnings that met or exceeded their dividend each quarter since going public, paying out $6.98 in dividends per share. While specific guidance for 2025 loan originations has not been provided, the company plans to deploy capital judiciously into good credits and new vintage loans with solid operators.

Liquidity

Advanced Flower Capital maintains a strong liquidity position, which enables it to capitalize on new lending opportunities and manage its existing portfolio effectively. The company's strategic use of the ATM program, combined with its disciplined approach to capital allocation, ensures that it can meet the growing demand for financing in the cannabis industry while maintaining a robust balance sheet.

As of September 30, 2024, the company reported:

- Cash: $122.16 million - Debt/Equity ratio: 0.4293 - Current ratio: 3.81 - Quick ratio: 3.81

Advanced Flower Capital has a $60 million senior secured revolving credit facility, which was fully drawn as of September 30, 2024. The facility matures in April 2025. The company stated they have over $75 million in liquidity available for deployment.

Industry Trends

The cannabis industry remains capital intensive, with growing demand for debt capital driven by refinancing activity, adult-use and medical expansions, and increased M&A. However, traditional lenders remain cautious, leading to favorable conditions for Advanced Flower Capital to deploy capital into deals with strong risk-adjusted returns.

Conclusion

In conclusion, Advanced Flower Capital's remarkable journey as a leading institutional lender in the cannabis industry is a testament to its strategic vision, operational excellence, and unwavering dedication to supporting the growth of state-compliant cannabis operators. As the industry continues to evolve, the company's specialized expertise and innovative financing solutions make it a standout player in the market. With a strong pipeline of potential deals, a disciplined approach to capital deployment, and a commitment to generating distributable earnings that support its dividend policy, Advanced Flower Capital is well-positioned to capitalize on the opportunities in the cannabis lending market and deliver long-term value to its shareholders.