Advanced Flower Capital Inc.

Welcome to the AFC Gamma First Quarter 2022 Earnings Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press 0, then 1 on your touch-tone phone. I will now turn the call over to Gabriel Katz, Chief Legal Officer.

Good morning, and thank you all for joining AFC Gamma's earnings call for the first quarter of 2022. I'm joined this morning by Leonard Tannenbaum, our Chief Executive Officer, Jonathan Calico, our Head of Real Estate, Robin Tannenbaum, our Head of Originations and Investor Relations, and Brett Kaufman, our Chief Financial Officer. Before we begin, I would like to note that this call is being recorded. Replay information is included in our May 10, 2022 press release and is posted in the Investor Relations section of AFC Gamma's website at afcgamma.com, along with our first 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, future market growth, capital markets activity, portfolio yield, and financial performance and projections in 2022. These statements are subject to the inherent uncertainties in predicting future results and conditions, and certain factors could cause actual results to differ materially from those projected in these forward-looking statements. New risks and uncertainties arise over time, and it is not possible for the company to predict those events or how they may affect these statements. Therefore, you should not place undue reliance on these forward-looking statements. Please refer to AFC Gamma's most recent 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 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, an overview of our first quarter 2022 performance, and strategic commentary. John will discuss AFC Gamma's portfolio. Robin will discuss the origination pipeline. Brett 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 Taneva.

Thank you, Gabe, and good morning, and welcome to AFC Gamma's earnings call for the first quarter of 2022. I would like to thank our analysts and investors for joining us today to discuss our results. Before turning to our first quarter results, I would like to briefly discuss the macro environment for cannabis. With a broader backdrop of rising interest rates and geopolitical unrest combined with cannabis-specific factors, such as the uncertainty of regulatory change and pricing compression, cannabis equities have been under pressure. Despite constraints in the equity markets, Many cannabis operators have growth plans either to expand in existing states or enter new states, and these growth plans still need to be completed. As a result, many operators are seeking debt to finance their growth, which allows AFC Gamma to maintain its high level of selectivity while maintaining our interest margins. Now, turning to our earnings. In the first quarter of 2022, AFC Gamma generated distributable earnings of $0.62 per weighted average share of common stock. Distributable earnings is the primary metric that the Board considers when declaring AFC Gamma's quarterly dividend. As a reminder, the Board of Directors declared a $0.55 dividend per share in the March quarter, which was paid on April 15, 2022, to shareholders of record as of March 31, 2022. This was the third consecutive quarterly increase to the dividend that was paid to our public shareholders. Since going public, we have generated distributable earnings well in excess of our dividend each quarter and currently have rollover income of approximately $3.1 million or 16 cents per share. At this time, the board expects the current quarterly dividend level should be at least 55 cents per share over the course of 2022. That quarterly dividend would produce, if not increased, a $2.20 annual dividend per share, which represents an approximately 13% dividend yield relative to March 31st, 2022 book value. Of course, that number is higher dividend yield on current share price. During the first quarter, we closed on new commitments of $46.9 million and a gross funding of $51.5 million. Subsequent to quarter end, we have closed on new commitments of $107.3 million and had gross fundings of $79.9 million. We are pleased that we were able to support the continued growth of two of our existing borrowers as they expand their businesses. Our robust pipeline of potential borrowers includes many new and existing borrowers that are expanding into new markets or further penetrating existing markets, though we continue to be focused on the limited licensed states. I would like to discuss a deal that we recently completed to demonstrate how AFC Gamma has the ability to grow with its borrowers as they expand and that power that being an incumbent lender provides. On April 20th, AFC Gamma closed a loan of up to $82.5 million to Bloom Medicinals, a privately held multi-state cannabis operator with licenses in Missouri, New Jersey, and Ohio. Bloom intends to use the proceeds from the credit facility to repay existing debt, fund expansion initiatives, and acquire a level one cultivation license in Ohio. AFC Gamma made its first loan to Bloom, Ohio in December 2020, secured by five dispensaries and made its second loan to Bloom, Missouri in April 2021, secured by a cultivation facility and four dispensaries. When Bloom came to AFC with the opportunity to vertically integrate in Ohio and roll the assets into the holding company, We were able to upsize our commitment and assist them in executing their vision. Given our unique hold size and understanding of their business, we were able to act fast and provide them with the capital necessary to close on the licensed transaction. We're excited to continue supporting Bloom as they expand their footprint. As the CEO and largest shareholder of AFC Gamma, my first priority is to protect shareholder capital. We are actively managing our portfolio, having regular dialogue with many of our clients, and are pleased with the coverage of our loans on an enterprise value basis. Additionally, as I described earlier, it's a challenging environment for many cannabis operators due to the pricing pressures, as well as increased costs for expansion due to supply chain shortages and inflation. We believe that our portfolio, which focuses on targeting vertically integrated operators in limited licensed states, is set up to mitigate risk and generate strong risk-adjusted returns. All of our borrowers are current with their interest payments, and there are no loans on non-accrual. As of May 9, 2022, the weighted average yield of the portfolio was approximately 18%. Given the increase in benchmark interest rates and the increased demand for capital relative to supply in the industry, We believe that pricing is firming versus the slight decrease we saw in pricing over the last two quarters. Therefore, we believe the weighted average yield to maturity will generally remain consistent for the foreseeable future. As the Federal Reserve has increased rates, we have examined the impact of rising rates in our portfolio. Approximately one-third of the portfolio currently has a floating interest rate, and we are focused on increasing that percentage over time. In addition, we issued $100 million of unsecured fixed interest rate debt in the fourth quarter of 2021. Turning to capital markets, during the March quarter, we completed a follow-on equity offering in January of this year. This provided AMC Gamma with approximately $63 million of deployable capital. The stock offering was accretive to book value by 41 cents per share. Very important is this next statement. We do not intend to sell stock below book value. Subsequent to quarter end, we continue to blend down AFC's capitals, AFC Gamma's cost of capital by entering into a third party $60 million senior secured revolving credit facility from two FDIC insured banks at a very attractive rate of prime plus one half a percent We are pleased to begin our relationship with these banks, which have over $70 billion of assets in the aggregate. This credit facility can expand to up to $100 million in commitments and fully replaces the $75 million revolving credit facility previously provided by AFC Finance, an affiliate of AFC Gamma. Looking ahead, we remain excited but highly selective in supporting the rapidly growing cannabis industry. we continue to remain focused on developing the best cost of capital among the limited number of alternative lenders in the industry. I will now turn the call over to John.

Thank you, Len. As an enterprise value lender, we carefully evaluate a company's cash flows, licenses, capital structure, and real estate prior to any loan we originate. Since our inception, nearly all of AFC Gamma's loans have had real estate as part of the collateral. And often underwriting real estate is the most challenging aspect of diligence, especially when any construction or rehabilitation of the property is involved. One of our core competencies and key differentiating factors as a lender focused on cannabis is our expertise and experience in both real estate and real estate finance. In the past two years, we have seen many operators experience increased in construction costs and delivery times. So when underwriting a loan, We utilize our knowledge of current construction conditions to enable us to correctly assess risks and timelines. We are able to leverage the expertise of our in-house construction team on loans made to cannabis entrepreneurs, entrepreneurs who may have little experience in commercial construction, thus providing borrowers with valuable insights while also amplifying AFC Gamma's collateral protections. In order for us to land on a construction project, we must have vetted and approved the borrower's general contractors, architects, engineers, construction documents, timelines, budgets, and contracts. But our work does not stop there. Once construction has begun, our in-house team, with the assistance of local third-party specialists, oversee construction progress to make sure the build is according to plan, invoices are accurate and processed timely, Construction procedures and safety measures are followed, and there is continued adherence to the project budget. Despite this challenging environment for many operators currently in cannabis, we believe our careful underwriting prior to loan origination and oversight throughout the life of our loans has enabled us to create and build upon a well-secured portfolio. I'll now turn the call over to Robin.

Thank you, John. As a reminder, AFC Gamma is an institutional lender to the cannabis industry. The loans that we make are typically secured by three pillars, cash flow, licenses, and real estate. The companies that we lend to are domestic single and multi-state operators, which include those that are privately held, as well as those listed on the Canadian exchanges. Our origination platform is focused on both expanding loans with a variety of our existing borrowers, and continually sourcing new borrowers. From January 2020 through May 9, 2022, we have sourced approximately $15 billion of transactions, which represents over 550 deals. The pipeline remains strong with an active pipeline of $783 million, yet it remains difficult to predict both the timing of converting and closing these deals. When sourcing deals, incumbency has proven to give us an important edge. closing over $150 million in deals so far this year where we were the incumbent lender. We continue to source new transactions and expand our lending platform while maintaining a high degree of selectivity. As of May 9th, from inception to date, our selectivity ratio was 3.9%. Currently, our portfolio consists of 12 borrowers across 16 states. We remain focused on creating a portfolio that is diversified across states and borrowers. As a reminder, currently, AFC Gamma has not lent to any borrowers with their primary operations in California, Washington, Oregon, or Oklahoma, four states that allow unlimited licenses and have continually experienced pricing pressure. Before turning the call over to Brett, as head of AFC Foundation, I'm excited to spotlight another deserving organization that we recently donated to in conjunction with Brady Cobb, the former CEO of our former borrower, One Plant. The Weldon Project is dedicated to funding social change and financial aid for those who are still serving prison time for nonviolent cannabis-related offenses. Through extensive partnerships throughout the legal cannabis industry, the Weldon Project launched the Mission Green Initiative to raise the bar for awareness, social justice, and social equity by providing unique ways for cannabis businesses and consumers to participate in a nationwide campaign aimed to provide relief to those who have been negatively impacted by prohibition. At AFC Foundation, we were impressed by how Weldon Angelos has turned a negative experience into becoming a positive voice, bringing about social change, and we look forward to supporting this deserving organization. I will now turn it over to Brett to review our financials.

Thank you, Robin. We are pleased to begin the current fiscal year with strong results in the first quarter. For the quarter ended March 31st, 2022, we recorded gap net income of $10.2 million or earnings of 53 cents per basic waived average common share. Compared to our fourth quarter of 2021, we had gap net income of $7 million or earnings of 43 cents per basic waived average common share. For the first quarter of 2022, we generated net interest income of $16.9 million and distributable earnings of $11.9 million or 62 cents per basic weight average common share compared to net interest income of $13 million and distributable earnings of $8.5 million or 52 cents per basic weight average common share for the fourth quarter of 2021. As of March 31st, 2022, our total assets were $454.1 million as compared to $464.8 million at December 31st, 2021, and $221.5 million at March 31st, 2021. As of March 31st, 2022, AFC Gamma's portfolio consisted of $420.1 million of current commitments with $370.6 million funded across our 13 borrowers. During the first quarter, we closed an additional $46.9 million of new commitments to existing borrowers, sold or repaid on $45 million from three investments, and we funded $51.5 million of new and existing commitments. As of May 9, 2022, we had $482.7 million of current commitments across 12 borrowers. The wave average portfolio yield to maturity, which is measured for each loan over the life of such loan, was approximately 19% as of March 31st, 2022, as well as as of December 31st, 2021. As mentioned on our last earnings call, we believe providing distributable earnings is helpful to stockholders in assessing the overall performance of AFC Gamma's business. Distributable earnings represents the net income computed in accordance with U.S. GAAP, excluding non-cash items such as equity compensation expense, any unrealized gains or losses, provision for current expected credit losses, also known as CECL, or other non-cash items recorded in net income or loss for the period. As of March 31st, 2022, the CECL reserve of our loans at carrying value represents approximately 1.5% compared to approximately 1.2% at December 31st, 2021. We continuously evaluate the credit quality of each loan by assessing the risk factors of each loan. The increase in the reserve is primarily due to the macroeconomic factors, changes in the loan portfolio, including new commitments and repayments, as well as changes in other data points we use in estimating the reserve. On April 15, 2022, AFC Gamma paid a dividend of 55 cents per common share for the first quarter to shareholders of record as of March 31st, 2022, an increase of 10% from the 50-cent dividend paid in the fourth quarter period, for the fourth quarter period. At the end of the first quarter, our total stockholders' equity was $336.5 million, and our book value per share was $17.04 as compared to $16.61 as of December 31st, 2021. The increase in our book value per share is primarily attributable to our follow-on equity offering in the first quarter. We completed the follow-on equity offering in January of this year, issuing approximately 3.3 million shares of common stock, which provided AFC Gamma with approximately 63 million of deployable capital. Subsequent to the first quarter, AFC Gamma entered into a senior secured revolving credit facility with $60 million of current commitments from two FDIC-insured banks and the ability to increase the facility to $100 million. The credit facility matures in April 2025 and will bear interest at a floating rate of prime plus a half a percent, subject to a total interest rate floor of four and a half percent. Upon closing the credit facility, AFC Gamma fully terminated its previous $75 million revolving credit facility that was provided by AFC Finance. We are pleased to have these two institutional banks supporting us, and we look forward to receiving additional commitments under the credit facility over time. As of today, $60 million is available under our credit facility. With that, I will now turn it back over to the operator to start the Q&A. Operator?

Thank you. We will now begin the question and answer session. If you have a question, please press 0, then 1 on your touch-tone phone. If you wish to be removed from the queue, please press 0, then 2. If you're using a speakerphone, please pick up the handset first before pressing the numbers. Once again, with your question, please enter the queue by pressing 0, then 1. We have our first question from Harrison Vivas with Cowan & Company.

Great. Thanks so much for taking the questions. So, Len, in the past couple quarters, you've given origination targets for the year. I think it was $500 to $700 million was the most recent for gross originations and $300 to $600 for net of repayments. So can you just kind of refresh us on your targets for this year? Do you still hold? And kind of what's your outlook for 2022?

Well, the good news is we do have the deal volume to be able to accomplish that. The bad news is, since you heard me say that we're not going to sell stock below book, or that we currently don't anticipate selling a stock below book, then I don't know how we're going to raise enough capital to deploy to satisfy that demand. So instead, you get more selective, you get better rates, you get even better deals. So it's great for the shareholders. We stay fully deployed and continue to earn a lot of money. But we're not able to expand potentially at the rate that we could, given our strong deal flow. So I still hold that we can do that for the year. We do have the deal flow to do it. I just, I don't know how many repayments we get and I don't know how much capital we're able to raise.

Understood. Would you consider allowing your debt to equity ratio kind of tick up on the debt side?

Well, we will because we took some senior debt and we do intend to use it and deploy it. It's at a really great cost of capital, but we don't anticipate issuing any more. Look, we're very lucky. and or good to issue $100 million of fixed rate debt with a five and three quarters coupon. I mean, to put it in perspective, you know, the Aries nine-year debt and Aries is a BBB minus or BBB multi-billion dollar BDC is trading at 6.2%. So, I mean, we have a very good cost of capital on that $100 million debt piece, and we're really pleased with that. Having said that, we're not going to issue more of it because I don't think we'd be able to issue more of it at that rate. And so I think we're going to stick with our debt-to-equity ratios, and we're going to stick to our discipline to make accretive equity deals like this last one for our shareholders where we made $0.41 a share in accretive book value on the last equity raise.

Absolutely. And so last one from me. Just given Schumer delayed his cannabis bill, do you think that jeopardizes any form of the safe back getting past this session? And kind of what's your outlook on some form of the safe passing this legislative session?

Thanks. You know, I've been out in different podcasts and panels talking about this, and it's funny. I was hoping, and it turns out that I still believe that it's going to pass on lame duck without capital market support, which actually is the perfect storm for AFCG and the other lenders. You're going to get additional institutions that can invest in us, but not necessarily the widespread banks and other lenders that can lend to the industry. So I think it's important to think of AFCG as a conduit. Look, it's a lot of work, diligencing these companies, working with them. These are direct deals. They're not sponsor-backed deals. There's a lot of KYC and anti-money laundering stuff that we do. So I think the banks are going to utilize us, lending group, as the conduit to the operators, and I think that role should generate really good yields.

Understood. Thanks very much. I'll hop back in the queue.

We have our next question from John Hecht with Jefferies.

Hey, guys. Thanks very much, and congratulations on a good quarter, and I'm getting a revolver. That sounds like that's a good opportunity. I'm wondering, can you talk about Len, forget for a moment that you trade below book value. Considering your good pipeline, assuming prepayments were somewhat normal and you guys worked through your pipeline in a fashion that's consistent with the store history, how big might the balance should be? This is not asking for guidance. It's just sort of saying if you didn't have constraints, how big must you grow this year just to give us a sense for the opportunity?

I think if the stock traded at a level that allowed us to do equity offerings that added to book value for our shareholders, I think our same plan we outlined last quarter and maybe the same indication the quarter before holds. where I think we could do $500 million to $700 million of gross originations. We're going to get $100 million to $200 million of repayments, maybe even a little more. We could net and grow the balance sheet by around $200 million to $300 million by the end of the year. I still think that that's the sort of benchmark, but it could be better or worse. It depends on the repayments, and it depends on where the stock trades.

Yep. And you talked about maybe a little bit of disruption on the macro basis that may be hitting some of the industry and maybe even some of the lenders. Can you give us an update of competition? It sounds like you're even able to kind of successfully firm up your requirements on a deal and still get a lot of volume. What's the competitive environment like in that regard?

Well, the good news for us is AFCG is not our only pocket of capital. So we have an expanded pocket of capital available to our clients. And that allows us to take hold sizes that are some of the biggest in the industry. And you could see that on the Bloom deal. You could see us holding $100 million of Verano where the REIT doesn't hold all of it, but we hold $100 million of Verano. And so that ability to do large deals, to develop the certainty of capital necessary for our clients when they want to build large projects is really important to them. It allows us to command a premium price. It allows us to lead a transaction. And I think that's really important. So I feel like we're really well positioned in the industry. There are a couple of competitors. Their stocks are also trading down. I can't tell you whether they're going to issue stock below book value, but, you know, we don't intend to. And so, you know, they'll run out of capital, and they also, my guess is, have smaller hold sizes than we do.

Okay. Wonderful. Thanks very much for taking my questions. Sure.

We have our next question from Mark Smith with Lake Street Capital Markets. Pardon me.

Hi, guys. First, just kind of a big picture question. Are you seeing any industry improvement in the mature states? And I know you're not in California, Washington, Oregon. But are you seeing any improvement there? Or are you seeing any continued weakness in some of the states where you may be operating?

So really, it's going state by state. I mean, we're seeing Pennsylvania cultivation fall off a cliff. And we're We're seeing Arizona, where we have a large exposure, actually firm up a little bit. It took a while to firm up after October, but it is firming. Michigan continues in decline and staying near the bottom. There's way too much oversupply. At the same time, New Jersey is great, right? So you're looking at every state constantly changing dynamics. and um and we're reevaluating and really keeping tabs on the pulse of what's going on it leads us to want to be in general with multi-state operators versus single state operators because i think single state risk is is really enhanced from two or three years ago okay and then as we see these volatile equity markets you know how much of an opportunity does this create um you know for

These guys looking for debt financing rather than equity financing, you know, and pushing them, you know, operators into you maybe rather than equity markets.

I mean, it creates a really a much better opportunity because, as I said, I think in previous calls, one of our biggest competitors and partners, right, were Canaccord and Seaport in terms of their ability to syndicate companies. All those partners that they're syndicate, all, all is a terrible word. Many of the partners that they syndicate to are full up on their cannabis exposure and are watching Cureleaf bonds trade 95 or south, watching Trulieve bonds trade down, watching Terrasen bonds trade down. They're taking losses. But also, rates have gone up 200 basis points, and that does affect the high end of the market, the more secure ones. So I think that rate backup really provides a floor for our discussions with the second-tier multi-state operators and saying, look, if Curaleaf is borrowing at X or Trulieve is borrowing at X and they're industry leaders, you know, you're wide of that. And then it's just a question of how wide you are. And so that conversation goes a lot better when those interest rates back up from the, you know, 9%, 10% to 11% to 12%. And so everything moves from there, as always happens, right? You take your industry benchmarks and you benchmark off of them.

Okay, great. Thank you.

And thank you. We have no further questions in queue. I will now turn the call over to Len Tenenbaum, CEO, for closing remarks.

Look, we really appreciate everyone attending the call. We had a very exciting quarter. We are all excited about our prospects as lending to the industry and our customers' prospects in developing their business plans. And we look forward to continuing reporting To you in the future quarter is our progress.

And thank you, ladies and gentlemen. This concludes our conference. We thank you for participating. You may now disconnect.