AFC Gamma(US:AFCG)2024-05-09 12:28Part I. Financial Information Financial Statements The unaudited consolidated financial statements for Q1 2024 report a net loss of $54,116, a significant decline from $10.0 million net income in Q1 2023, with total assets increasing to $476.4 million and liabilities rising to $165.8 million Consolidated Balance Sheets Total assets increased to $476.4 million as of March 31, 2024, driven by growth in loans, while total liabilities rose to $165.8 million due to increased borrowings, leading to a decrease in shareholders' equity to $310.6 million Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :--- | :--- | :--- | | Total Assets | $476,406 | $466,585 | | Cash and cash equivalents | $82,298 | $121,626 | | Loans held for investment, net | $383,522 | $338,717 | | Total Liabilities | $165,785 | $146,533 | | Line of credit payable, net | $60,000 | $42,000 | | Senior notes payable, net | $88,163 | $88,015 | | Total Shareholders' Equity | $310,621 | $320,052 | Consolidated Statements of Operations The company reported a net loss of $54,116 for Q1 2024, a significant decline from $10.0 million net income in Q1 2023, primarily due to decreased net interest income, increased credit loss provisions, and unrealized losses on loans Statements of Operations Highlights (in thousands) | Metric | Q1 2024 (in thousands) | Q1 2023 (in thousands) | | :--- | :--- | :--- | | Net Interest Income | $14,758 | $16,832 | | Total Expenses | $6,015 | $6,412 | | Provision for current expected credit losses | $(4,932) | $(702) | | Change in unrealized (losses) on loans at fair value, net | $(3,614) | $(1,478) | | Net (Loss) Income | $(54) | $10,025 | | Diluted (Loss) Earnings Per Share | $(0.01) | $0.49 | Consolidated Statements of Shareholders' Equity Shareholders' equity decreased to $310.6 million as of March 31, 2024, primarily due to $9.9 million in common stock dividends and a net loss of $54,116, partially offset by stock-based compensation - Dividends declared on common shares were $0.48 per share in Q1 2024, totaling $9.9 million, compared to $0.56 per share in Q1 2023, which totaled $11.5 million19 Consolidated Statements of Cash Flows Cash and cash equivalents decreased by $39.3 million in Q1 2024, with $6.4 million provided by operating activities, $53.9 million used in investing activities, and $8.2 million provided by financing activities Cash Flow Summary (in thousands) | Activity | Q1 2024 (in thousands) | Q1 2023 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $6,373 | $4,383 | | Net cash (used in) provided by investing activities | $(53,881) | $14,992 | | Net cash provided by (used in) financing activities | $8,180 | $(79,141) | | Net (decrease) in cash | $(39,328) | $(59,767) | Notes to the Consolidated Financial Statements The notes detail accounting policies, loan portfolio composition, credit loss provisions, and debt structure, highlighting the company's specialization in cannabis industry loans and expansion into commercial real estate, with several loans on non-accrual status - The company primarily originates, structures, and manages senior secured loans, with a specialization in loans to cannabis industry operators and, more recently, to the broader commercial real estate sector2628 - The Current Expected Credit Loss (CECL) Reserve increased to $31.4 million as of March 31, 2024, from $26.4 million at year-end 2023, representing 8.71% of total loans held at carrying value5658 - As of March 31, 2024, the company had $60.0 million outstanding on its Revolving Credit Facility and $90.0 million in principal outstanding on its 5.75% 2027 Senior Notes6369 - Subsequent to the quarter's end, in April 2024, a borrower (Subsidiary of Public Company H) defaulted on its interest payment, and the lenders are evaluating their rights and remedies119 Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of the company's business, recent developments including the planned spin-off of its CRE portfolio, and financial performance, noting a decrease in net income due to lower interest income and higher credit loss provisions, with Distributable Earnings at $0.49 per share for Q1 2024 Overview and Spin-Off The company, a lender specializing in cannabis industry loans, has expanded into commercial real estate lending and announced a plan to spin off its CRE portfolio into Sunrise Realty Trust, Inc. (SUNS) to refocus on its core cannabis business - The company has expanded its investment guidelines from solely cannabis-related loans to include a broader range of commercial real estate (CRE) lending opportunities126128 - Announced a plan to spin-off its CRE portfolio into a new, independent, publicly-traded REIT, Sunrise Realty Trust, Inc. (SUNS), to allow AFCG to focus on its core cannabis lending strategy135136138 First Quarter Developments and Loan Portfolio In Q1 2024, the company funded $85.8 million in new loans, primarily in CRE, managed several non-accrual loans, and received a full repayment from Private Company I, with the total loan portfolio outstanding principal at $439.2 million - Funded two new CRE mezzanine loans (CRE Private Co. A and B) with a combined principal of $46.7 million140141 - Private Company I, previously on non-accrual, was fully repaid, with the company receiving $3.8 million in principal and recognizing $0.7 million in past-due cash interest149 - Placed Private Company A on non-accrual status effective March 1, 2024, and continued to manage non-accrual loans with Private Company G and Private Company K through forbearance agreements143145147 Results of Operations and Key Metrics Q1 2024 saw a net loss of $(0.1) million, a significant decline from $10.0 million net income in Q1 2023, primarily due to decreased interest income and increased credit loss provisions, with Distributable Earnings at $0.49 per share GAAP Net (Loss) Income to Distributable Earnings Reconciliation (in millions) | Metric (in millions) | Q1 2024 (in millions) | Q1 2023 (in millions) | | :--- | :--- | :--- | | Net (loss) income | $(0.1) | $10.0 | | Stock-based compensation | $0.5 | $0.3 | | Unrealized losses | $3.6 | $1.5 | | Provision for credit losses | $4.9 | $0.7 | | TRS (income) loss, net | $0.9 | $(0.9) | | Distributable earnings | $10.0 | $11.6 | | Distributable earnings per share | $0.49 | $0.57 | - Interest income decreased by $2.1 million (11.6%) YoY, primarily due to a loan to Subsidiary of Private Company G being on non-accrual status166 - The provision for current expected credit losses increased by $4.2 million YoY, driven by changes in macroeconomic factors and borrower-specific conditions176 Liquidity and Capital Resources As of March 31, 2024, the company held $82.3 million in cash and cash equivalents, with its $60.0 million revolving credit facility fully drawn and $90.0 million in senior notes outstanding, while no shares were sold or repurchased during the quarter - Cash and cash equivalents stood at $82.3 million as of March 31, 2024, down from $121.6 million at the end of 2023199 - The company had $60.0 million of borrowings outstanding under its Revolving Credit Facility, with zero remaining availability as of March 31, 2024203 - No shares were sold under the At-the-Market (ATM) program or repurchased under the Share Repurchase Program during Q1 2024200201 Quantitative and Qualitative Disclosures About Market Risk The company's market risk disclosures highlight exposure to interest rate, credit, and real estate risks, with 51% of the loan portfolio being floating-rate and the top four borrowers representing 58.3% of outstanding principal - The company is exposed to interest rate risk, with 51% of its loan portfolio (by principal) having floating interest rates as of March 31, 2024227 - A hypothetical 100 basis point increase in floating benchmark rates would increase annual interest income by approximately $2.3 million, while a 100 basis point decrease would lower it by approximately $1.9 million234 - The loan portfolio has significant credit risk concentration, with the top four borrowers representing approximately 58.3% of the aggregate outstanding principal balance as of March 31, 2024242 - The company faces unique risks related to its cannabis industry loans, including the federal illegality of cannabis and potential inability to take possession of collateral, which management mitigates by monitoring the legal landscape and planning to sell defaulted loans rather than foreclose244246 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2024, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report249 - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control251 Part II. Other Information Legal Proceedings The company was not subject to any material legal proceedings as of March 31, 2024 - As of March 31, 2024, the company was not subject to any material legal proceedings253 Risk Factors No material changes to the Risk Factors disclosed in the Annual Report for the fiscal year ended December 31, 2023 - There were no material changes to the Risk Factors disclosed in the company's Annual Report for the fiscal year ended December 31, 2023254 Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities and no share repurchases during the quarter, with $20.0 million remaining in its repurchase program - The company did not have any unregistered sales of equity securities during the period255 - No shares of common stock were repurchased during the three months ended March 31, 2024, under the company's $20.0 million share repurchase program256257 Defaults Upon Senior Securities No defaults upon senior securities were reported - None reported258 Mine Safety Disclosures Not applicable - Not applicable259 Other Information None reported - None reported260 Exhibits This section lists all exhibits filed with the 10-Q report, including amendments to agreements and CEO/CFO certifications - The report includes a list of all exhibits filed, such as the Indenture for the 2027 Senior Notes and CEO/CFO certifications261