Business Overview and History
Advanced Flower Capital Inc. (AFCG) is a leading commercial mortgage REIT that provides institutional loans to state law-compliant cannabis operators in the United States. The company has established itself as a trusted financing partner, leveraging its deep industry expertise and disciplined underwriting approach to navigate the challenges and opportunities within the dynamic cannabis sector.
Advanced Flower Capital was founded in July 2020 by a veteran team of investment professionals with extensive experience in the finance industry. The company's primary focus is on originating, structuring, underwriting, and managing senior secured loans and other types of debt instruments, with a specialization in lending to cannabis industry operators in states where medical and/or adult-use cannabis is legal.
AFCG completed its initial public offering (IPO) in March 2021, marking a significant milestone in its growth trajectory. The company is externally managed by AFC Management, LLC, a Delaware limited liability company, pursuant to the terms of the Amended and Restated Management Agreement.
In July 2021, AFCG's wholly-owned subsidiary, AFCG TRS1, LLC, began operating as a taxable real estate investment trust subsidiary. The financial statements of TRS1 are consolidated within AFCG's consolidated financial statements, providing a comprehensive view of the company's operations.
A notable development in AFCG's history occurred on July 9, 2024, when the company completed the spin-off of its wholly-owned subsidiary, Sunrise Realty Trust, Inc. (SUNS). SUNS held AFCG's commercial real estate loan portfolio and became an independent, publicly traded REIT. As a result of this spin-off, the operating results of the SUNS business through the date of the spin-off are reported in net income from discontinued operations in AFCG's consolidated financial statements.
AFCG has elected to be taxed as a real estate investment trust (REIT) for United States federal income tax purposes, commencing with its taxable year ended December 31, 2020. This election provides significant tax advantages, as the company generally will not be subject to United States federal income taxes on its REIT taxable income as long as it annually distributes all of its REIT taxable income prior to the deduction for dividends paid to shareholders and complies with various other requirements as a REIT.
Since its inception, AFCG has built a diversified portfolio of loans, carefully selecting borrowers with strong track records and operations in attractive cannabis markets. As of December 31, 2024, the company's portfolio consisted of 16 loans with an aggregate originated commitment of approximately $361.3 million and an outstanding principal balance of $356.8 million. The weighted average portfolio yield to maturity stood at an impressive 18%.
Navigating the Evolving Cannabis Landscape
The cannabis industry has experienced significant growth and evolution in recent years, with more states legalizing medical and adult-use cannabis. AFCG has demonstrated its ability to adapt to the changing landscape, refining its underwriting and portfolio management strategies to capitalize on emerging opportunities while mitigating risks.
In 2024, the company set three key goals: (1) restart the origination engine and close at least $100 million of new originations, (2) increase portfolio diversification while enhancing underwriting, and (3) reduce exposure to underperforming credits through active portfolio management. By the end of the fiscal year, AFCG had successfully originated $135 million in new commitments, exceeding its target, and made progress on the other two initiatives.
Robust Pipeline and Diversification Efforts
AFCG's active pipeline remains strong, with over $380 million in potential deals as of March 1, 2025. The company is focused on sourcing and backing operators with proven track records, selectively providing construction financing to operators with existing operations in other states. This strategic approach has enabled AFCG to continue diversifying its portfolio and strengthen its position as a leading provider of debt capital to the cannabis industry.
Recent Developments and Portfolio Management
In February 2025, AFCG committed and funded a $15 million senior secured credit facility to Story of Ohio, a leading multi-state cannabis operator, to support its expansion in the growing Ohio adult-use market. This transaction aligns with the company's strategy of supporting strong operators in attractive limited-license states.
AFCG has also been actively managing its portfolio, working to address underperforming credits. In 2024, the company received $119 million in paydowns from five underperforming loans and redeployed that capital into nine new loans. While the company continues to navigate challenges with certain borrowers, such as the ongoing situation with Subsidiary of Private Company G, AFCG remains focused on preserving shareholder value and unlocking the potential of its portfolio through strategic portfolio management efforts.
Financials
For the fiscal year ended December 31, 2024, AFCG generated revenue of $52 million, net interest income of $45.7 million, and distributable earnings of $34.9 million, or $1.68 per basic weighted average common share. The company reported GAAP net income of $16.8 million, or $0.78 per basic weighted average common share. Operating cash flow for the year was $21.6 million, which was also the free cash flow as the company had no capital expenditures.
In the fourth quarter of 2024, AFCG reported revenue of $9.2 million, a 42.3% decrease compared to Q4 2023, and a net loss of $1 million. The decrease in revenue and net income in Q4 2024 was primarily driven by the underperformance of some legacy loans in the portfolio, which impacted the company's earnings.
For the year ended December 31, 2024, AFCG funded approximately $128.8 million of new loans and additional principal, while receiving $53.4 million in principal repayments of loans held at carrying value and selling $90 million in the aggregate of its investments in Subsidiary of Public Company H and Subsidiary of Public Company M.
As of December 31, 2024, AFCG had total assets of $402.1 million, including $103.6 million in cash and cash equivalents. The company's total shareholder equity stood at $201.4 million, with a book value per share of $9.02. Loans held for investment at carrying value, net of a $30.4 million current expected credit loss reserve, amounted to $293.3 million, while loans held for investment at fair value totaled $30.5 million.
Liquidity
AFCG maintains a strong liquidity position, with $89 million available under its revolving credit facilities as of March 1, 2025. This provides the company with ample resources to continue funding new loan originations and managing its portfolio.
The company's debt-to-equity ratio as of December 31, 2024, was 0.72. AFCG had $103.6 million in cash and two revolving credit facilities: a $60 million facility that was undrawn and a $40 million unsecured facility that was fully drawn. The current ratio and quick ratio both stood at 4.19, indicating strong short-term liquidity.
Loan Portfolio and Interest Rates
As of December 31, 2024, AFCG's loan portfolio was concentrated among established cannabis industry participants, with the top three borrowers representing approximately 48.2% of the aggregate outstanding principal balances and 44% of the total loan commitments. The company's largest credit facility accounted for approximately 22.2% of the aggregate outstanding principal balances and 20.3% of its total loan commitments.
These loans are typically secured by real estate, equipment, cash flows, and the value associated with licenses where applicable, as well as other assets of the borrowers, to the extent permitted by applicable laws and regulations. Approximately 52% of the company's loans held at carrying value had floating interest rates, with the benchmark rates including one-month Secured Overnight Financing Rate (SOFR) subject to a weighted average floor of 3.8% and quoted at 4.3%.
Guidance and Future Outlook
For the first quarter of 2025, AFCG has provided dividend guidance of $0.23 per share, which is expected to be in line with or close to their first and second quarter distributable earnings. While the company has not provided specific origination or portfolio growth guidance for the full year 2025, management remains optimistic about the pipeline of opportunities in the cannabis lending space.
Human Capital
It's worth noting that AFCG is an externally managed company and does not have any direct employees. The company relies on the management team and investment professionals provided by its external manager, AFC Management, LLC, to execute its business strategy and manage day-to-day operations.
Regulatory Landscape and Risks
The cannabis industry, in which AFCG operates, is subject to a complex and evolving regulatory environment. While the company is not directly engaged in the cultivation, processing, or sale of cannabis, it faces risks related to the federal illegality of cannabis and the potential for strict enforcement against its borrowers. AFCG's ability to grow or maintain its business is dependent on state laws pertaining to the cannabis industry, and any adverse changes to these laws could have a material impact on the company's operations.
Additionally, AFCG's borrowers may face challenges in renewing or maintaining their licenses or other authorizations necessary for their cannabis operations, which could result in defaults and adversely affect the company's financial performance. The company's loans also lack liquidity, which could limit its ability to quickly exit underperforming positions.
Conclusion
Advanced Flower Capital has established itself as a leading provider of institutional debt capital to the cannabis industry, navigating the complexities of the evolving regulatory landscape and the ongoing challenges faced by its borrowers. The company's disciplined underwriting approach, diversification efforts, and active portfolio management have positioned AFCG for continued success, as it seeks to capitalize on the growing demand for debt financing in the cannabis sector. While risks remain, AFCG's experienced management team and robust pipeline of opportunities position the company well to continue generating attractive risk-adjusted returns for its shareholders.