AFC Gamma, Inc. (NASDAQ:AFCG) Q3 2023 Earnings Call Transcript
AFC Gamma, Inc. (NASDAQ:AFCG) Q3 2023 Earnings Call Transcript November 8, 2023
AFC Gamma, Inc. beats earnings expectations. Reported EPS is $0.49, expectations were $0.48.
Operator: Good day and welcome to the AFC Gamma 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 is being recorded. I would now like to turn the call over to Gabriel Katz, Chief Legal Officer. You may begin.
Gabriel Katz: Good morning and thank you all for joining AFC Gamma's earnings call for the quarter ended September 30, 2023. I'm joined this morning by Leonard Tannenbaum, our Chief Executive Officer; Brandon Hetzel, our Chief Financial Officer; and Robyn 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 AFC Gamma's website at afcgamma.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 in predicting future results and conditions. Please refer to AFC Gamma's 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 earnings, which is a non-GAAP financial measure. Reconciliations of net income, the most comparable GAAP measure to distributable earnings can be found in AFC Gamma's earnings release and investor presentation available on AFC Gamma's website. The format for today's call is as follows. Len will provide introductory remarks and 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.
Leonard Tannenbaum: Thank you Gabe. Good morning and welcome to AFC Gamma's earnings call for the quarter ended September 30, 2023. 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 Neville, the new Chief Executive Officer of AFC Gamma effective this coming Monday. As Dan joins us in his 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 multi-state vertically integrated cannabis operator where he's held various roles including Interim CEO and most recently as Chief Financial Officer.
Dan joined Ascend as 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 in revenue. Dan's expertise in cannabis operations, M&A activity and deal structuring uniquely positions him to lead AFC Gamma as CEO. We have noticed that as a lend area has become increasingly important to have in-house operating expertise to contribute to the underwriting and portfolio management of cannabis credits. Therefore, Dan's operating and M&A expertise combined with my 25 years of direct lending experience, position AFC 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 Ascend.
For example, we have the opportunity to witness Dan's expertise firsthand as he led Ascend's 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 AFC Gamma as we enter the next phase of the cannabis industry. The appointment of Dan as CEO reaffirms, AFC Gamma's commitment to lending to the cannabis industry. As we have discussed on a quarterly basis over the last year we are increasingly seeing cannabis 3.0 operators emerge and we are excited to deploy capital and expand AFC Gamma's platform as operators have a difficult time accessing the capital markets. I believe AFC Gamma 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/or expand by buying distressed assets or assets at a significant discount.
Turning to the quarterly results. For the third quarter of 2023, AFC Gamma generated distributable earnings of $0.49 per basic weighted average share of common stock. As a reminder, distributable earnings is the primary metric that the Board considers when declaring AFC Gamma's quarterly dividend. The Board of Directors declared a $0.48 dividend per share in the September quarter. Since going public, we have generated distributable earnings that have met or exceeded our dividend each quarter and paid out $5.06 in dividends per share. In June of this year, management stated that we anticipated the $0.48 dividend represented a sustainable dividend level on the current portfolio for 2023, assuming no significant nonaccruals and without any additional investments.
Despite our investment in private company G being put on nonaccrual 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 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 in 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 newly formed well-capitalized operators that we believe will continue to consolidate 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-use in Ohio passed yesterday, which we believe will be a large positive for operators in the state. AFC Gamma 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, two borrowers have been placed into receivership to optimize operations and maximize value for the benefit of the creditors. One of the borrowers, private company A, has been actively liquidating certain assets and has so far paid down over $48 million in principle to AFC 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 have discussed during the last several quarters, a subsidiary of private company G which we closely -- continue to closely monitor, continues to have cash flow challenges as it completes a valuable construction project in New Jersey.
As we stated last quarter, we put a subsidiary of private company G on nonaccrual for the month of June. As we did not receive interest payments in July and August, the bar remained on nonaccrual 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. AFC Gamma has received its portion of the $800,000 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 into income that's not been paid in cash. We continue to remain excited about the near-term prospects in New Jersey and look forward to the full optimization of their cultivation facility.
As I 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 30, 2023, we have decreased that level to a much more normalized level of 10%. We are pleased about the significant decrease in PIK, 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.
Brandon Hetzel: Thank you, Len. For the quarter ended September 30, 2023, we had GAAP net income of $8 million or earnings of $0.39 per basic weighted average common share and generated net interest income of $15.3 million and distributable earnings of $9.9 million or $0.49 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 Gamma's business. Distributable earnings represents the net income computed in accordance with GAAP excluding non-cash items such as stock compensation expense and the unrealized gains or losses, provision for current expected credit losses also known as CECL, taxable REIT subsidiary income or loss net of dividends and other non-cash 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, 2023, we received select principal prepayments of debt relating to private company A of $1.7 million. As of November 30, 2023, AFC gamma had $395.1 million of principal outstanding across 12 borrowers. As of September 30, 2023, the CECL reserve represents approximately 4.7% of our loans at carrying value consistent with 4.7% as of June 30, 2023. 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 30, 2023, and November 30, 2023. Next let's take a look at our balance sheet which remains strong. As of September 30, 2023, 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 4.5% to 5.4%. As of September 30, 2023, our total shareholder equity was $338.8 million and our book value per share was $16.56. On October 30, 2023, AFC Gamma paid a dividend of $0.48 per common share for the third quarter to shareholders of record as of September 30, 2023. 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?
Operator: [Operator Instructions] Our first question comes from Michael Elias with TD Cowen. Your line is open.
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