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AFC Gamma(AFCG) - 2024 Q4 - Annual Report
AFCGAFC Gamma(AFCG)2025-03-13 11:30
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Loan Origination and Management - As of March 1, 2025, the loan origination pipeline consists of potential new loans to cannabis operators with prospective total loan commitments of approximately 383million[39].−FromJanuary1,2020,toMarch1,2025,themanagementteamsourcedover383 million[39]. - From January 1, 2020, to March 1, 2025, the management team sourced over 20.6 billion of loans across the cannabis industry[39]. - The management team has underwritten over 400 loans with a principal value exceeding 10.0billionduringtheircareers[41].−Thecompanyintendstofundpotentialloansusingunusedborrowingcapacityunderitsseniorsecuredrevolvingcreditfacilityandothersources[40].−Theinvestmentstrategyfocusesonfirstandsecondlienloanssecuredbyrealestatecollateral,specificallytargetingloansgreaterthan10.0 billion during their careers[41]. - The company intends to fund potential loans using unused borrowing capacity under its senior secured revolving credit facility and other sources[40]. - The investment strategy focuses on first and second lien loans secured by real estate collateral, specifically targeting loans greater than 10 million[102][106]. - Since January 1, 2020, the company had 9 active loans in its pipeline and passed on 828 of 871 sourced loan opportunities due to various risk factors[107]. - The investment process emphasizes a disciplined underwriting approach, with loans screened based on company profile, state dynamics, and regulatory matters[105][107]. - The company employs a comprehensive review and selection process to mitigate credit risk associated with its loans[549]. Management Agreement and Fees - The Management Agreement automatically renews every year on July 31 for a one-year period unless either party elects not to renew[56]. - The company has entered into multiple amendments to its Management Agreement to update investment guidelines and payment processes[49][50][51][52]. - The Management Agreement allows for termination by the company with 30 days' notice for breaches by the Manager, including fraud or bankruptcy[57]. - The company may terminate the Management Agreement with 60 days' notice if it defaults on material terms, incurring a termination fee[58]. - The Termination Fee upon Management Agreement termination equals three times the sum of the annual Base Management Fee and annual Incentive Compensation earned in the prior 12 months[98]. - For the year ended December 31, 2024, the Manager earned a Base Management Fee of approximately 3.6million,netofaBaseManagementFeeRebateofapproximately3.6 million, net of a Base Management Fee Rebate of approximately 0.9 million[78]. - The Incentive Compensation fee payable to the Manager for the year ended December 31, 2024 was approximately 6.8million,comparedto6.8 million, compared to 10.4 million for 2023[78]. - Total management fees for the year ended December 31, 2024 amounted to 13.3million,downfrom13.3 million, down from 17.7 million in 2023[79]. - The Base Management Fees were revised to 0.375% of Equity as of the last day of each quarter[81]. - The Hurdle Amount for Incentive Compensation is now set at 2% of Adjusted Capital as of the last day of the preceding fiscal quarter[84]. - The Annual Hurdle Amount for Clawback Obligation is now equal to 8% of Adjusted Capital as of the last day of the preceding fiscal year[87]. - The Manager did not seek reimbursement for Mr. Tannenbaum's compensation for the year ended December 31, 2024[78]. - The total Base Management Fees for 2023 were approximately 3.7million,netofarebateof3.7 million, net of a rebate of 1.7 million[78]. - The total management fees for 2023 included approximately 5.4millionbeforedeductions[79].InvestmentGuidelinesandCompliance−Theinvestmentguidelineshavebeenamendedtofocusoninvestmentsinfirstandsecondlienloanssecuredbymortgagestocannabisoperators[53].−ThecompanyhasestablishedInvestmentGuidelinestoensurecompliancewithREITregulationsandinvestmentstrategies[63].−TheInvestmentCommitteeisresponsibleforreviewingloanopportunitiesandensuringcompliancewithInvestmentGuidelines[65].−Co−investmentswithotherinvestmentvehiclesmanagedbytheManagerarepermitted,withlimitedrisktothecompany[68].−Thecompanyactivelymonitorsthelegallandscapeaffectingthecannabisindustrytomitigaterisksassociatedwithitsloanportfolio[556].MarketandRegulatoryEnvironment−Thecannabisindustryremainsillegalatthefederallevel,butstatelegalizationeffortsareexpanding,with41statesallowingcommercialsalesformedicalpurposes[123].−Thecompany’sborrowersfacesignificantregulatorycomplianceburdens,whichmaylimittheirabilitytoexpandandcouldimpactthecompany′sinvestments[124].−Thecompanyissubjecttovariousregulations,includingtheEqualCreditOpportunityActandtheUSAPatriotAct,impactingitslendingoperations[112].−TheDodd−FrankActhasintroducedsignificantregulatorychangesthatmayaffectthecompany′soperations,withongoingdevelopmentsinapplicableregulations[113].−ThecompanyhasnotbeenrequiredtoregisterundertheInvestmentCompanyAct,maintainingitsoperationsundertheSection3(c)(5)Exemption[115].FinancialPerformanceandRiskManagement−CoreEarningsforthequarterwere5.4 million before deductions[79]. Investment Guidelines and Compliance - The investment guidelines have been amended to focus on investments in first and second lien loans secured by mortgages to cannabis operators[53]. - The company has established Investment Guidelines to ensure compliance with REIT regulations and investment strategies[63]. - The Investment Committee is responsible for reviewing loan opportunities and ensuring compliance with Investment Guidelines[65]. - Co-investments with other investment vehicles managed by the Manager are permitted, with limited risk to the company[68]. - The company actively monitors the legal landscape affecting the cannabis industry to mitigate risks associated with its loan portfolio[556]. Market and Regulatory Environment - The cannabis industry remains illegal at the federal level, but state legalization efforts are expanding, with 41 states allowing commercial sales for medical purposes[123]. - The company’s borrowers face significant regulatory compliance burdens, which may limit their ability to expand and could impact the company's investments[124]. - The company is subject to various regulations, including the Equal Credit Opportunity Act and the USA Patriot Act, impacting its lending operations[112]. - The Dodd-Frank Act has introduced significant regulatory changes that may affect the company's operations, with ongoing developments in applicable regulations[113]. - The company has not been required to register under the Investment Company Act, maintaining its operations under the Section 3(c)(5) Exemption[115]. Financial Performance and Risk Management - Core Earnings for the quarter were 5,225,000, representing a 5.2% quarterly return on Adjusted Capital of 100million[93].−TheHurdleAmountwassetat100 million[93]. - The Hurdle Amount was set at 2,000,000, which is a 2.0% quarterly return on the same Adjusted Capital[93]. - The total Incentive Compensation calculated was 1,045,000,derivedfromaCatch−UpAmountofapproximately1,045,000, derived from a Catch-Up Amount of approximately 666,667 and an Excess Earnings Amount of approximately 378,333[93].−Thecompanyaimstoprovideattractiverisk−adjustedreturnsthroughcashdistributionsandcapitalappreciationbyfundingloanstocannabiscompanies[100].−Thecompanyoperatesinahighlycompetitivemarketforlendingopportunities,facingcompetitionfromvariousinstitutionalinvestors,includingREITs,banks,andprivateequityfunds[110].−ThecompanyhasaflexiblefundingstructurethatallowsforquickerredeploymentofcapitalcomparedtotraditionalREITmodels,enhancingitscompetitiveadvantage[111].−Thecompany’soperatingresultsdependonthedifferencebetweenincomeearnedonassetsandthecostofborrowing,whichissensitivetomarketinterestrates[544].−Interestrateriskismanagedthroughamixoffloating−andfixed−rateloanstomitigatetheimpactofrisinginterestrates[545].−Ahypothetical100basispointsincreaseinthefloatingbenchmarkratewouldresultinanincreaseinannualinterestincomeofapproximately378,333[93]. - The company aims to provide attractive risk-adjusted returns through cash distributions and capital appreciation by funding loans to cannabis companies[100]. - The company operates in a highly competitive market for lending opportunities, facing competition from various institutional investors, including REITs, banks, and private equity funds[110]. - The company has a flexible funding structure that allows for quicker redeployment of capital compared to traditional REIT models, enhancing its competitive advantage[111]. - The company’s operating results depend on the difference between income earned on assets and the cost of borrowing, which is sensitive to market interest rates[544]. - Interest rate risk is managed through a mix of floating- and fixed-rate loans to mitigate the impact of rising interest rates[545]. - A hypothetical 100 basis points increase in the floating benchmark rate would result in an increase in annual interest income of approximately 8.3 million[545]. - The fair value of loans may fluctuate significantly due to market conditions, with a decrease of 50 bps or increase of 50 bps resulting in an unrealized gain (loss) of approximately 0.3million[545].−Thelargestcreditfacilityaccountedforapproximately22.20.3 million[545]. - The largest credit facility accounted for approximately 22.2% of the aggregate outstanding principal balances and approximately 20.3% of total loan commitments, with a principal amount of 79.2 million outstanding[553]. - As of December 31, 2024, the company had eight floating-rate loans, representing approximately 44% of the portfolio based on aggregate outstanding principal balances[545]. - The top three borrowers represented approximately 48.2% of the aggregate outstanding principal balances as of December 31, 2024[553].