AFC Gamma(AFCG) - 2022 Q4 - Annual Report

Loan Origination and Pipeline - As of March 1, 2023, the loan origination pipeline includes potential new loans to commercial real estate owners and cannabis operators, with total prospective loan commitments of approximately $454 million and $245 million, respectively[41]. - From January 1, 2020, to March 1, 2023, the management team sourced over $17.0 billion of loans across the cannabis industry while maintaining a robust pipeline of actionable opportunities[41]. - The company intends to focus on senior secured loans to cannabis industry operators and secured loans to commercial real estate owners, with a principal balance typically greater than $5.0 million[98][99]. - As of March 1, 2023, the company had 20 active loans in its commercial real estate pipeline and had passed on 117 of 137 sourced loan opportunities due to various reasons[103]. - For the cannabis pipeline, as of March 1, 2023, there were 14 active loans, with 666 out of 709 sourced opportunities passed on due to lack of collateral and cash flow[105]. Management and Compensation - The Management Agreement allows for an internalization transaction if equity exceeds $1,000,000,000, with a potential offer price based on five times the sum of the annual Base Management Fee and Incentive Compensation[48]. - The Management Agreement was amended on March 6, 2023, to allow investments in second lien loans secured by mortgages to businesses not related to the cannabis industry[52]. - For the year ended December 31, 2022, the Manager earned a Base Management Fee of approximately $3.4 million, net of a Base Management Fee Rebate of approximately $1.8 million[75]. - The Incentive Compensation fee payable to the Manager for the year ended December 31, 2022, was approximately $12.3 million, compared to $6.0 million for the year ended December 31, 2021[75]. - Total management fees for the year ended December 31, 2022, amounted to $19.7 million, significantly higher than $10.6 million for the previous year[76]. Risk Management and Compliance - The company actively manages risk exposure by monitoring its portfolio and investing in a mix of floating- and fixed-rate loans to mitigate interest rate risk[536]. - The company is subject to various regulations, including the Equal Credit Opportunity Act and the USA Patriot Act, impacting its lending operations[111]. - The cannabis industry remains illegal at the federal level, creating legal uncertainty for the company's borrowers and potential investment losses[116]. - The company expects compliance with multiple regulatory regimes to place a significant burden on its borrowers, potentially limiting their expansion[120]. - Management plans to monitor the legal landscape to mitigate risks associated with the cannabis industry[556]. Financial Performance and Metrics - Core Earnings for the quarter were $5,225,000, representing a quarterly yield of 20.9% on Adjusted Capital of $100.0 million[88]. - The Hurdle Amount was set at $2,000,000, calculated as a 2.0% quarterly return on Adjusted Capital[88]. - The total Incentive Compensation payable to the Manager was $1,045,000, which includes a Catch-Up Amount of approximately $666,667 and an Excess Earnings Amount of approximately $378,333[88]. - The Base Management Fees are calculated as 0.375% of the company's Equity, determined as of the last day of each quarter[77]. - The Manager's compensation structure includes both Base Management Fees and Incentive Compensation, with the latter based on achieving targeted levels of Core Earnings[79]. Loan Portfolio and Investment Strategy - The company has a secured revolving credit facility to fund potential loans, along with net proceeds from future debt and equity offerings[42]. - The company has committed approximately $84.9 million under the Private Company A Credit Facility, with multiple amendments increasing loan commitments[68]. - The loan portfolio was concentrated with the top four borrowers representing approximately 70.8% of the aggregate outstanding principal balances[552]. - Approximately 54% of the portfolio's loans were tied to floating rates, including LIBOR and SOFR, as of December 31, 2022[546]. - The company employs a comprehensive review and selection process to mitigate credit risk associated with its loans[549]. Competitive Landscape - The company faces competition from various institutional investors, including REITs and banks, which may have greater financial resources and lower costs of funds[108]. - The company believes it has a competitive advantage due to its Manager's expertise and a flexible funding structure, allowing for quicker redeployment of capital[109].