AFC Gamma Inc Largest Institutional Lender to Pot Industry
The U.S. cannabis industry got a bit of a jolt at the beginning of April after the House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act). The legislation decriminalizes pot at the federal level. (Source: “U.S. House of Representatives Passes Federal Cannabis Legalization Bill MORE Act,” Forbes, April 1, 2022.)
Chances are good the bill will stall in the senate, however, even though 91% of Americans are in favor of legalizing cannabis in some form.
The senate should pass the legislation, though. What politician wants to be out of step with 91% of the population? And what politician would say no to billions of new tax dollars?
If the MORE Act doesn’t get passed by the senate, Congress should at least consider passing the Secure and Fair Enforcement Banking Act of 2021 (Safe Banking Act). The bill would get the pot legalization ball rolling by cutting red tape that prevents cannabis companies from accessing traditional banking services.
The U.S. tax code currently prevents weed companies from deducting businesses expenses such as salaries, utilities, health insurance, marketing, repairs, rent, and payments to contractors. (Source: “26 U.S. Code § 280E – Expenditures in Connection With the Illegal Sale of Drugs,” Cornell Law School, last accessed April 13, 2022.)
As a result, U.S. cannabis companies pay up to 70% of their income in taxes.
Even if/when the Safe Banking Act gets passed, there will be marijuana companies looking for capital outside of traditional banking channels. One company that lends capital to pot operators is AFC Gamma Inc (NASDAQ:AFCG), which has a first-mover advantage.
AFC Gamma (the “AFC” stands for advanced flower capital) is a real estate investment trust (REIT) that provides institutional loans to high-quality cannabis companies in the U.S. (Source: “Q4 2021 Earnings Presentation,” AFC Gamma Inc, March 10, 2022.)
To date, AFC Gamma has reviewed 505 deals, representing $13.7 billion in aggregate value. Of those deals, the company has funded 16, rejected 377, and is currently reviewing 104. The REIT continues to source deals across the marijuana industry, maintaining a strong pipeline of active opportunities.
As of December 31, 2021, AFC Gamma Inc had total loan commitments of $419.2 million ($363.7 million of which had been funded) across 16 portfolio companies.
The fixed and floating loans provided by AFC Gamma Inc typically include amortization and/or cash flow sweeps, significant collateral, favorable pricing, and average annual gross yields of approximately 12% to 20%.
Record Q4 Gross Originations
In the fourth quarter ended December 31, 2021, AFC Gamma advanced its position as a leading cannabis industry lender, with a record $127.3 million in gross originations. (Source: “AFC Gamma Posts Record $127.3 Million in Gross Originations for Quarter Ended December 31, 2021,” AFC Gamma Inc, January 3, 2022.)
For the full year ended December 31, 2021, AFC Gamma’s gross funding was $302.5 million. Furthermore, the company closed on total commitments of $341.3 million.
That momentum has carried into 2022. In March, AFC Gamma expanded its senior credit facilities with three borrowers: Verano Holdings Corp (NASDAQ:VRNOF), Devi Holdings Inc, and Natrabis LLC. (Source: “AFC Gamma Expands Existing Senior Secured Credit Facilities With Three Existing Borrowers,” AFC Gamma Inc, March 7, 2022.)
AFC Gamma has committed an additional $26.6 million under the expansion of Verano’s credit facility. AFC Gamma now holds $86.6 million in total of the expanded credit facility.
The REIT has committed an additional $15.3 million to Devi’s credit facility, now holding $77.8 million in total of the expanded credit facility.
Moreover, AFC Gamma Inc has committed an additional $5.0 million under the expansion of Natrabis’ credit facility, now holding the entire $15.5-million expanded credit facility.
Great Q4 & 2021 Results
For the fourth quarter ended December 31, 2021, AFC Gamma’s net income jumped by 218% year-over-year to $7.0 million, or $0.43 per share. Its distributable earnings in the quarter were $8.5 million, or $0.52 per share. (Source: “AFC Gamma, Inc. Announces Financial Results for Fourth Quarter and Full Year 2021,” AFC Gamma Inc, March 10, 2022.)
During the fourth quarter, the company closed $127.3 million of new commitments and funded $125.6 million of new and existing commitments.
The REIT’s full-year revenue climbed by 386% to $21.0 million, or $1.57 per share. Its distributable earnings were $24.7 million, or $1.85 per share.
During the full year, the company closed on $341.3 million of new commitments.
AFC Gamma Inc Increases Dividend by 10%
One of the joys of investing in a REIT is that it’s legally obligated to return virtually all of its earnings to investors in the form of dividends.
Thanks to AFC Gamma Inc’s rapidly expanding portfolio and the growth of the cannabis industry, management was able to increase AFC Gamma stock’s quarterly dividend by 10% to $0.55 per share. This represents the company’s third consecutive quarterly dividend increase.
AFCG stock’s payout is safe, too. Since going public, the company’s dividends have never exceeded its distributable earnings.
AFC Gamma Inc is relatively small, with a market cap of $359.3 million. The company has been growing quickly, however. This has led Wall Street analysts to provide a bullish outlook for AFCG stock, with a 12-month average share-price forecast of $24.00 and a high estimate of $29.00.
For AFC Gamma stock investors, this translates to potential gains between 33% and 60.6%.
Chart courtesy of StockCharts.com
AFC Gamma Inc is the only Nasdaq-listed provider of institutional loans to the U.S. cannabis industry. It has a first-mover advantage, long-term client relationships, and a solid balance sheet (raising $100.0 million in senior notes in Q4 2021).
In the fourth quarter and full year of 2021, the company reported record gross origins. Its outlook for 2022 looks even more promising.
While AFCG stock is trading down by 14% year-over-year, its growing, ultra-high yield should help investors weather short-term volatility.