West Palm Beach-based cannabis REIT AFC Gamma, Inc. (Nasdaq: AFCG) reported its financials for the second quarter ending June 30, showing a net income of $12.1 million.
Still, AFC Gamma’s net interest income of $16.1 million marked a 19.1% year-over-year decline, falling short of expectations by $1.01 million.
In a statement, CEO Leonard M. Tannenbaum commented on the company’s investment strategy.
“At AFC Gamma, we continue to take a hands-on approach in managing our portfolio,” said Tannenbaum. He further highlighted that the company’s exposure to certain high-risk credits decreased due to strategic decisions made during the quarter.
The earnings break down to $0.59 per basic weighted average common share. Additionally, the company announced distributable earnings of $9.9 million, or $0.49 per basic share.
“Subsequent to the quarter end, we made a new cannabis investment into one of the well-capitalized operators that we believe will continue to consolidate valuable assets in the key markets and we maintain ample liquidity for attractive debt investments,” he added.
According to financial filings, the company is now setting aside less money for potential unpaid loans in the first half of 2023 compared to 2022. However, the actual amount it has reserved in 2023 is higher than in 2022. The company believes the changes are due to factors like shifts in the economy, adjustments in its lending activities, and changes in how it calculates potential losses.
As of June 2023, AFC Gamma has set aside $13.4 million, which represents 4.68% of all their loans, to cover any potential losses from unpaid loans. That is a meaningful jump from June 2022 when it had only reserved $5.6 million, which was 1.76% of all their loans at that time.
Several partnered companies adjusted their loan strategies during the period, with some resorting to property sales to settle debts. A handful missed payment deadlines, raising more concerns of potential property losses. But a few bright spots emerged, too: some firms opted to repay loans ahead of schedule.
Additionally, the company saw some opportunities, acquiring select debts at discounted rates. And even though AFC Gamma had set aside a big pot of money for selling shares last year, the firm held off on any share offerings through mid-2023.
Four Major Clients
The company did note that at the end of June 2023, the portfolio was concentrated with the top four borrowers representing approximately 74.9% of the aggregate outstanding principal balances and approximately 73.3% of the total loan commitments.
AFC went on to say in its filing, “Additionally, the industry is experiencing significant consolidation, which we expect to increase, among cannabis operations and certain of our borrowers may combine, increasing the concentration of our borrower portfolio with those consolidated operators. Our largest credit facility represented approximately 21.2% of the aggregate outstanding principal balances of our portfolio and approximately 20.6% of our total loan commitments as of June 30, 2023. The borrower under this credit facility is a Subsidiary of Public Company H, a multi-state operator with real estate assets in several states, certain of which have been included as collateral in connection with the senior term loan.”