the ability of our Manager to locate suitable loan opportunities for us, monitor service and administeractively manage our loansportfolio and executeimplement our investment strategy;
our expected ranges of originations and repayments;
the allocation of loan opportunities to us by our Manager;
our projected operating results;
actions and initiatives of the U.S. or state governments and changes to government policies and the execution and impact of these actions, initiatives and policies, including the fact that cannabis remains illegal under federal law; thelaw and certain state of the United States, European Union and Asian economies generally or in specific geographic regions;laws;
the estimated growth in and evolving market dynamics of the cannabis market;
the demand for cannabis cultivation and processing facilities;
shifts in public opinion regarding cannabis;
the state of the U.S. economy generally or in specific geographic regions;
economic trends and economic recoveries; and
the amount, collectability and timing of our cash flows, if any, from our loans;
our ability to obtain and maintain financing arrangements;
Changeschanges in the value of our loans;
our expected portfolio of loans;
our expected investment and underwriting process;
the rates of default or decreased recovery rates on our loans;
the degree to which our hedging strategies may or may not protect us from interest rate volatility;
changes in interest rates of our loans and impacts of such changes on our results of operations, cash flows and the market value of our loans;
interest rate mismatches between our loans and our borrowings used to fund such loans;
the departure of any of the executive officers or key personnel supporting and assisting us from our Manager or its affiliates;
impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters;
our ability to maintain our exemption from registration under the Investment Company Act of 1940 (the “1940 Act”);Act;
our ability to qualify and maintain our qualification as a real estate investment trust (“REIT”)REIT for United StatesU.S. federal income tax purposes;
estimates relating to our ability to make distributions to our stockholders in the future;
our understanding of our competition; and
market trends in our industry, interest rates, real estate values, the securities markets or the general economy.
We use words such as “anticipates,” “believes,” “expects,” “intends,” “will,” “should,” “may”New risk factors and similar expressionsuncertainties emerge from time to identify forward-looking statements, althoughtime, and it is not possible for us to predict all forward-looking statements include these words. Ourthe risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results and financial condition couldto differ materially from those implied or expressedcontained in theany forward-looking statements. The forward-looking statements for any reason, including the factors set forth in “Risk Factors” and the other information included in our Final Prospectus and elsewheremade in this quarterly report on Form 10-Q.
We have based the forward-looking statements included in this quarterly report onQuarterly Report relate only to events or information available to us onas of the date of this quarterly report, and we assume no obligation to update any such forward-looking statements. Althoughthey are made. Except as required by law, we undertake no obligation to reviseupdate or updaterevise any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including annual reports on Form 10-K, registration statements on Form S-11, quarterly reports on Form 10-Q and current reports on Form 8-K.
Available Informationotherwise.
We routinely post important information for investors on our website, www.afcgamma.com. We intend to use this webpage as a means of disclosing material information, for complying with our disclosure obligations under Regulation FD and to post and update investor presentations and similar materials on a regular basis. AFCG encourages investors, analysts, the media and others interested in AFCG to monitor the Investors section of our website, in addition to following our press releases, SEC filings, public conference calls, presentations, webcasts and other information we post from time to time on our website. To sign-up for email-notifications, please visit the “Email Alerts” section of our website under the “IR Resources” section and enter the required information to enable notifications.25
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview
AFC Gamma, Inc. (the ‘Company” or “AFCG” or “we”) is a commercial real estate finance companyan institutional lender to the cannabis industry that was founded in July 2020 by a veteran team of investment professionals. We originate, structure and underwrite, and invest in senior secured loans and other types of loans and debt securities for established cannabis industry operators in states that have legalized medicinalmedical and/or adult use cannabis. As states continue to legalize cannabis for medical and adult use, an increasing number of companies operating in the cannabis industry need financing. Due to the currently capital constrained cannabis market which does not typically have access to traditional bank financing, we believe we are well positioned to becomecontinue as a prudent financing source to established cannabis industry operators given our stringent underwriting criteria, size and scale of operations and institutional infrastructure. Our objective is to provide attractive risk-adjusted returns over time through cash distributions and capital appreciation by providing loans to state law compliant cannabis companies. The loans we originate are primarily structured as senior loans secured by real estate, equipment, value associated with licenses and/or other assets of the loan parties to the extent permitted by applicable laws and the regulations governing such loan parties. Our targetedSome of our borrowers will sometimes be publicly tradedhave their equity securities listed for public trading on the Canadian StockSecurities Exchange (“CSE”) in Canada and/or over-the-counter (“OTC”) in the United States. Our loans typically have up to a five-year maturity and contain amortization and/or cash flow sweeps. As ofWe commenced operations on July 31, 2020 and completed our initial public offering (“IPO”) in March 31, 2021 members of our management team, provided by our Manager, and the members of the Investment Committee of our Manager, who advises on our investments and operations, had sourced loans worth approximately $5.5 billion across the cannabis industry in various states while maintaining a robust pipeline of potentially actionable opportunities.
.
We are externally managed by our Manager, AFC Management, LLC, a Delaware limited liability company, pursuant to the terms of our Management Agreement.
We commenced operations on July 31, 2020 and completed our IPO in March 2021. We are incorporated in Maryland and intend to elect and qualifyhave elected to be taxed as a real estate investment trust (“REIT”),REIT, commencing with our taxable year endingended December 31, 2020. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all or substantially all of our taxable income to stockholders and maintain our intended qualification as a REIT. We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company ActAct.
Our wholly-owned subsidiary, AFCG TRS1, LLC (“TRS1”), operates as a taxable REIT subsidiary. TRS1 began operating in July 2021. Our investment in the equipment loan to Public Company A was transferred to TRS1 on July 31, 2021 and constituted substantially all of 1940,the assets of TRS1 as amended (the “Investmentof March 31, 2022. The financial statements of TRS1 have been consolidated within our consolidated financial statements.
On April 1, 2022, our investment in the senior secured loan to Private Company Act”).I was transferred to TRS1.
We are an “emerging growth company,” as defined in the Jumpstart Our Business StartupsJOBS Act, (“JOBS Act”), and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements available to smaller reporting companies and emerging growth companies, the information contained herein may be different from the information you receive from other public companies.
We could remain an “emerging growth company” for up to five years from our IPO, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act, of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700$700.0 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three yearthree-year period.
Developments duringin the First Quarter of 2021:2022:
Equity and Debt Offerings
On March 23, 2021,January 10, 2022, we completed our initial publican underwritten offering (“IPO”) of 6,250,0003,000,000 shares of our common stock, at a price of $19.00$20.50 per share, raising $118.8share. Our gross proceeds from the offering were $61.5 million, in gross proceeds. Thebefore deducting underwriting discounts and commissions, a structuring fee and offering expenses. In connection with the offering, the underwriters also exercised theirwere granted an over-allotment option to purchase up to an additional 937,500450,000 shares of our common stock at a pricestock. On January 14, 2022, the underwriters partially exercised the over-allotment option with respect to 291,832 shares of $19.00 per share,common stock, which was completed on May 26, 2021, raising $17.8 million in gross proceeds.January 19, 2022. The underwriting commissions of $8.3approximately $3.5 million and $1.2 million, respectively, arewere reflected as a reduction of additional paid-in capital onin the statementfirst quarter of stockholders’ equity.fiscal year 2022. We incurred approximately $3.1$1.0 million of expenses in connection with the IPO, which is reflected as a reduction in additional paid-in capital. The net proceedsoffering. After giving effect to us totaled approximately $123.9 million. We intend to use the net proceedspartial exercise of the IPO (i) to fund loans related to unfunded commitments to existing borrowers, (ii) to originate and participate in commercial loans to companies operatingover-allotment option, the total number of shares sold in the cannabis industry that are consistent with our investment strategypublic offering was 3,291,832 shares and (iii) for working capitaltotal gross proceeds, before deducting underwriting discounts and commissions, a structuring fee and other general corporate purposes. Until appropriate investments can be identified,offering expenses, were approximately $67.5 million.
Pursuant to the Articles of Amendment, dated March 10, 2022, we may invest this balance in interest-bearing short-term investments, including money market accounts or funds, commercial mortgage-backed securities and corporate bonds, which are consistent with our intentionincreased the number of authorized shares of common stock from 25,000,000 to qualify as a REIT and to maintain our exclusion from registration under the Investment Company Act.50,000,000 shares at $0.01 par value per share.
Updates to Our Loan Portfolio during the First Quarter of 20212022
During the first quarter of 2022, we increased commitments to three current borrowers in the amount of approximately $46.9 million and funded approximately $51.5 million of principal amount of new and existing commitments. Additionally, we sold one investment in debt securities of $15.0 million, sold one loan of $10.0 million, and were repaid by Private Company E of approximately $20.0 million.
In January 2021, PublicFebruary 2022, Private Company A andE repaid its related loan parties entered into Modification Agreements for each of the Public Company A loans pursuant to which we agreed, subject to certain terms and conditions, to forbear from exercising our rights and remedies regarding defaults by the loan parties resulting from, among other things, the loan parties’ failure to timely pay taxes due, incurrence of mechanic’s liens and tax liens on assets, failure to notify the lenders of such failure to pay and incurrence of liens, failure to make payments due in January 2021 under the Public Company A loans in an aggregate amount of $789,177 owed to all lenders, failure to make payment obligations owed to third party creditors and failure to enter into specified debt restructuring transactions. In exchange for such agreement to forbear, we and the other lenders received certain consideration. Such defaults were unrelated to the COVID-19 pandemic. Under the modification agreement relating to the Public Company A real estate loan (the “RE Modification Agreement”), we and the other lenders agreed to forbear until the earlier of December 21, 2021 and the existence of any new event of default, and the terms of the real estate loan were modified to, among other things, (i) extend the maturity date from June 27, 2021 to December 21, 2021, (ii) modify the interest rate to 14.0%, with 12.0% paid monthly and 2.0% paid at maturity and (iii) add an exit fee of $1.0 million payable upon payment in full of the real estate loan on the maturity date. The RE Modification Agreement also provided for the establishment of an interest reserve for the payment of the last three months of interest on the real estate loan. Additional consideration for the RE Modification Agreement included (w) a modification fee in an amount equal to 3.0% per annum on the outstanding principal of the real estate loan from May 19, 2020 to the effective date of the RE Modification Agreement less certain fees previously paid, (x) the right to acquire common shares of Public Company A in an aggregate amount equal to $1.2 million, (y) the right to acquire warrants to purchase common shares of Public Company A and (z) reimbursement of certain expenses. We sold our portion of the rights to acquire the common shares and warrants received as considerations for the RE Modification Agreement to the administrative agent under the Public Company A real estate loan documents. Under the modification agreement relating to Public Company A equipment loan (the “Equipment Modification Agreement” and, together with the RE Modification Agreement, the “Modification Agreements”), we and the other lenders agreed to forbear until the earlier of February 5, 2024 and the existence of any new event of default, and the terms of the equipment loan were modified to, among other things, (i) amend the payment schedule allowing for reduced monthly payments for three months, with the reduced amounts amortized equally over the remaining monthly payments, (ii) add an exit fee of $500,000 due at the end of the term of the agreement governing the equipment loan, (iii) release a certain guarantor, and (iv) add a new parent company guarantee. Additional consideration for the Equipment Modification Agreement included (x) a modification fee in an amount equal to 6.0% per annum on the outstanding principal of the equipment loan from May 19, 2020 through and including the effective date of the Equipment Modification Agreement less certain fees previously paid, (y) an additional fee of $500,000 payable in equal monthly installments commencing April 5, 2021 and (z) reimbursement of certain expenses. In connection with the Modification Agreements, Public Company A consummated the initial closing of $10.1 million of its non-brokered convertible debenture offering for up to $25.0 million of debenture units. The net proceeds received by Public Company A from the convertible debenture offering are intended to be used for working capital, previous debt obligations and general corporate purposes.full. The loan parties have since paid the January 2021 payments under the Public Company A loans and there are no delinquent payment obligations owed to us under the agreements governing the Public Company A loans. To the best of our knowledge, Public Company A has repaid in full the other monetary obligations it owed under the Modification Agreement. While Public Company A was able to obtain these modifications and consummate the above-referenced convertible debentures offering, Public Company A and its related loan parties may have difficulty meeting their future obligations. None of our other borrowers are now, or have previously been, in default under their respective loan agreements with us.
In March 2021, we entered into a commitment to Private Co. E for a $21 million senior term loan and funded $7 million at closing, including a $2 million interest reserve. The loan hashad an interest rate of 12% plus LIBOR per annum with a LIBOR floor of 1% and PIK interest of 4%. The loan has aoriginal maturity date of April 2026 and the outstanding principal on the date of repayment was approximately $20.0 million. We received a prepayment premium of approximately $1.3 million upon repayment of the loan.
In February 2022, we committed an unused feeadditional $15.3 million under the expansion to the Private Company A Credit Facility, and now hold $77.8 million in total of 3% and OID of 8.7%. Private Co. E is a single-state medical cannabis operator in Ohio. Its operations consist of a cultivationthe expanded credit facility, currently in construction and an operational dispensary. The real estate collateral for this senior term loan includes bothadditional $1.0 million of the dispensary and cultivation facility in Ohio.
expansion was syndicated.
Sale of Assigned Rights
In January 2021February 2022, we sold our Assigned Rights$15.0 million investment in the Public Company G debt securities for 106% of the face value, resulting in a loss of approximately $0.2 million. This investment was classified as available-for-sale as of December 31, 2021.
In March 2022, we entered into the fourth amendment of the Amended and Restated Credit Agreement with Public Company F to, acquire and/or assignamong other things, increase the total loan commitments by $100 million, with approximately (i) 578,476 common shares$26.6 million of the new loan commitments allocated to us; (ii) $15.0 million of the new loan commitments allocated to Flower Loan Holdco LLC; and (iii) the remaining loan commitments allocated to third-party lenders by the third-party agent.
In March 2022, we committed an additional $5.0 million under the Private Company B credit facility. Following the expansion, we now hold $15.5 million in commitments, of which we funded approximately $12.9 million of total principal amount.
In March 2022, we sold our $10.0 million investment in the Subsidiary of Public Company A and (ii) warrants to purchase approximately 289,238 common shares of Public Company A at an exercise price based on a specified formula tied to the volume weighted average trading price of such common shares, to the third-party administrative agent under the Public Company A loansD for an aggregate purchase price of $103,302.
In March 2021, we sold to AFC Warehouse Holding, LLC, an affiliate106% of the Manager and us, an Assigned Right to acquire and/or assignpar value, resulting in a warrant to purchase 1,382,000 common sharesgain of Private Co. E at an exercise price of $0.01 per share for an aggregate purchase price of $1,104,614, representing the fair value of such Assigned Right as of the date of such sale, as determined by management and the majority of independent directors (based on various subjective and objective factors, including input from an independent third-party valuation firm).approximately $0.6 million.
Dividends Declared Per Share
In December 2020, we declared a seven-for-one stock split in the form of a stock dividend, pursuant to which six additional shares of our common stock shall be issued for each outstanding share of our common stock, payable on January 25, 2021 to each stockholder of record as of the close of business on January 21, 2021 out of our authorized but unissued shares of common stock.
In March 2021,2022, we declared a regular cash dividend of $0.36$0.55 per share of our common stock, relating to the first quarter of 2021,2022, which was paid on March 31, 2021April 15, 2022 to stockholders of record as of March 15, 2021.31, 2022. The aggregate amount of the regular cash dividend payment was approximately $2.2$10.9 million.
The payment of these dividends are not indicative of our ability to pay such dividends in the future.
Recent Developments
In May 2021, we declared a regular cash dividend of $0.38 per share of our common stock, relatingSubsequent to the secondend of the first quarter, the Company closed two new loans with commitments of 2021 which will be paid on June 30, 2021 to stockholdersapproximately $107.3 million, and funded approximately $79.9 million of record as of June 15, 2021. The aggregateprincipal amount of the regular cash dividend payment will be approximately $5.1 million. The payment of this dividend is not indicative of our ability to pay such dividends in the future.new and existing commitments.
Subsequent to March 31, 2021, we closed 3 loans, committed to $50 million, funded $42.3 million, and were repaid approximately $12.1 million, for net fundings of approximately $30.2 million.
In April 2021, Sub. Of Public Co. C2022, each of the loans to Private Company D and Private Company F were repaid theirin full in connection with the Company’s new loan in full.to Private Company L, an affiliate of Private Company D and Private Company F. The loanloans to Private Company D and Private Company F had an original maturity datedates of February 2025January 2026 and theMay 2026, respectively. The outstanding principal of Private Company D and Private Company F on the date of repayment was approximately $12.1 million. Wemillion and $12.9 million, respectively. In addition to the repayment of outstanding principal amounts of the loan to Private Company D and Private Company F, the Company received anapproximately $0.2 million and $2.0 million related to exit fee of $750,000fees and a prepayment premium of $750,000other fees upon repayment of the loan.loans, respectively.
In April 2021,2022, the loan to Private Company K was repaid in connection with our refinancing and restructuring the loan under a new credit facility with Private Company K. Under the new credit facility with Private Company K, we increased the total loan commitment to approximately $24.8 million, from $19.8 million, and restructured the construction obligations of the borrowers, among other things. As restructured, the Private Company K loan accrues interest at a floating rate, with a floor of 13%, and matures in May 2027. Following the repayment of Private Company K loan, five of our loans have been repaid prior to maturity since March 2021.
In April 2022, we filed our shelf registration statement on Form S-3 with the SEC, registering the offer and sale of up to $1.0 billion of securities (the “Shelf Registration Statement”). The Shelf Registration Statement enables us to issue shares of common stock, preferred stock, debt securities, warrants, rights, as well as units that include one or more of such securities. The Shelf Registration Statement also included a prospectus for an at-the-market offering program to sell up to an aggregate of $75.0 million of shares of our common stock (the “ATM Program”) that may be issued and sold from time to time under the Sales Agreement, dated April 5, 2022 (the “Sales Agreement”), with Jefferies LLC and JMP Securities LLC, as Sales Agents. Under the terms of the Sales Agreement, we have agreed to pay the Sales Agents a commission of up to 3.0% of the gross proceeds from each sale of common stock under the Sales Agreement. As of May 9, 2022, no securities have been issued pursuant to the Shelf Registration Statement or the ATM Program the date of this filing.
On April 29, 2022, we entered into the Loan and Security Agreement (the “Revolving Credit Agreement”) by and among us, the other loan parties from time-to-time party thereto, the lenders party thereto, and the Lead Arranger, Bookrunner and Agent party thereto, pursuant to which, the Company obtained a commitment to a $13$60.0 million senior term loan and funded $5.25 million at closing, including a $925,000 interest reserve. The loan has an interest rate of 13% and PIK interest of 4% with a step down to 2% once certain criteria are met as defined in the loan agreement. The loan has a maturity date of May 2026, an unused fee of 3%, an exit fee of 15% and OID of 15.5%senior-secured revolving credit facility (the “Revolving Credit Facility”). The borrower is a medical cannabis operatorRevolving Credit Facility contains aggregate commitments of $60.0 million from two FDIC-insured banking institutions, which may be increased to up to $100.0 million in Missouri. The real estate collateral for this senior term loan includes the borrower’s cultivationaggregate (subject to available borrowing base and two dispensary facilities in Missouri.
In April 2021, we entered into a commitment to a $15 million senior term loan and funded $15 million at closing. The loan has an interest rate of 13%. The loan hasadditional commitments), with a maturity date of April 202529, 2025. Interest is payable on the Revolving Credit Facility at the greater of (1) the applicable base rate plus 0.50% and OID of 7%. The borrower is a multi-state medical and recreational cannabis provided with operations in Florida, Texas, Michigan and Pennsylvania. The real estate collateral for this senior term loan includes the borrower’s cultivation facility in Michigan.
In April 2021, we entered into a commitment to a $22 million senior term loan and funded $22 million at closing, including a $2 million interest reserve. The loan has an interest rate of 12% plus LIBOR, with a 1% LIBOR floor, and PIK interest of 4% with step downs to 2% and 1.5% once certain criteria are met as defined in the loan agreement. The loan has a maturity date of May 2026, an exit fee of 10%, provided that if certain criteria are met as defined in the loan agreement the exit fee is 2%, and OID of 4%. The borrower’s parent entity has licenses across nine states, and the real estate collateral for this senior term loan includes the borrower’s retail facility in New Jersey and its cultivation facility under construction in New Jersey. This senior term loan relates to the Syndication Letters, as defined and discussed in our Final Prospectus, whereby the loan was initially contemplated as a $46,150,000 commitment and our Manager had syndicated $22 million to us and $24,150,000 to an affiliate, AFC Investments, LLC, subject to satisfactory diligence and definitive loan documentation. The final negotiated loan commitment was for $22 million and AFCG holds the entire amount, with no portion syndicated AFC Investments, LLC.
In May 2021, we amended our senior secured revolving credit agreement, dated August 18, 2020, by and among us, as borrower, and AFC Finance, LLC, an affiliate of ours and our management, as a lender and agent and Gamma Lending Holdco LLC, an entity controlled by Jonathan Kalikow, our Head of Real Estate and one of our directors, and his father (2) 4.50%, as a lender (as may be amended, supplemented, amended and restated or otherwise modified from time to time, the “Revolving Credit Agreement”). The amendment toprovided in the Revolving Credit Agreement, increased the loan commitment from $40 million to $50 million, decreased the interest rate from 8% per annum to 6% per annum, removed Gamma Lending Holdco LLC as a party thereto and extended the maturity date from July 31, 2021 to the earlier of (i) December 31, 2021 or (ii) the date of the closing of any credit facility where the proceeds are incurred to refund, refinance or replace the Revolving Credit Agreement with an aggregate principal amount equal to or greater than $50 million (any such financing, a “Refinancing Credit Facility”)payable in accordance with the termscash in the Revolving Credit Agreement. We did not incur any fees or cost related to the amendment of the Revolving Credit Agreement and the Revolving Credit Agreement does not have any unused fees. As of the date of this quarterly report, we have not drawn on the Revolving Credit Agreement or incurred any fees or interest expense related to the Revolving Credit Agreement.arrears.
Key Financial Measures and Indicators
As a commercial real estate finance company, we believe the key financial measures and indicators for our business are Distributable Earnings, Adjusted Distributable Earnings, book value per share and dividends declared per share.
Non-GAAP Metrics
Distributable Earnings and Adjusted Distributable Earnings
In addition to using certain financial metrics prepared in accordance with GAAP to evaluate our performance, we also use Distributable Earnings and Adjusted Distributable Earnings to evaluate our performance excluding the effects of certain transactions and GAAP adjustments we believe are not necessarily indicative of our current loan activity and operations. Each of Distributable Earnings and Adjusted Distributable Earnings is a measure that is not prepared in accordance with GAAP. We use these non-GAAP financial measures both to explain our results to stockholders and the investment community and in the internal evaluation and management of our businesses. Our management believes that these non-GAAP financial measures and the information they provide are useful to investors since these measures permit investors and stockholders to assess the overall performance of our business using the same tools that our management uses to evaluate our past performance and prospects for future performance.
The determination of Distributable Earnings is substantially similar to the determination of Core Earnings under our Management Agreement, provided that Core Earnings is a component of the calculation of any Incentive FeesCompensation earned under the Management Agreement for the applicable time period, and thus Core Earnings is calculated priorwithout giving effect to Incentive FeeCompensation expense, while the calculation of Distributable Earnings accounts for any Incentive FeesCompensation earned for such time period.
We define Distributable Earnings as, for a specified period, the net income (loss) computed in accordance with GAAP, excluding (i) non-cash equitystock-based compensation expense, (ii) depreciation and amortization, (iii) any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss); provided that Distributable Earnings does not exclude, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash, (iv) provision for current expected credit losses, (v) TRS (income) loss and (v)(vi) one-time events pursuant to changes in GAAP and certain non-cash charges, in each case after discussions between our Manager and our independent directors and after approval by a majority of such independent directors. We define Adjusted Distributable Earnings, for a specified period, as Distributable Earnings excluding certain non-recurring organizational expenses (such as one-time expenses related to our formation and start-up).
We believe providing Distributable Earnings and Adjusted Distributable Earnings on a supplemental basis to our net income as determined in accordance with GAAP is helpful to stockholders in assessing the overall performance of our business. As a REIT, we are required to distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, and to pay tax at regular corporate rates to the extent that we annually distribute less than 100% of such taxable income. Given these requirements and our belief that dividends are generally one of the principal reasons that stockholders invest in our common stock, we generally intend to attempt to pay dividends to our stockholders in an amount at least equal to our netsuch REIT taxable income, if and to the extent authorized by our Board. Distributable Earnings is one of many factors considered by our Board in declaringauthorizing dividends and, while not a direct measure of net taxable income, over time, the measure can be considered a useful indicator of our dividends.
Distributable Earnings and Adjusted Distributable Earnings are “non-GAAPis a non-GAAP financial measures”measure and should not be considered as substitutes for GAAP net income. We caution readers that our methodology for calculating Distributable Earnings and Adjusted Distributable Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our reported Distributable Earnings and Adjusted Distributable Earnings may not be comparable to similar measures presented by other REITs.
The following table provides a reconciliation of GAAP net income to Distributable Earnings and Adjusted Distributable Earnings:
| | | Three months ended March 31, | |
| | For the three months ended March 31, 2021 | | | 2022 | | | 2021 | |
Net Income | | $ | 1,400,755 | | | $ | 10,162,120 | | $ | 1,400,755 | |
Adjustments to net income | | | | | | | | |
Non-Cash Equity compensation expense | | 1,599,115 | | |
Stock-based compensation expense | | | 990,023 | | 1,599,115 | |
Depreciation and amortization | | - | | | - | | - | |
Unrealized (gain), losses or other non-cash items | | 144,402 | | | (80,843 | ) | | 144,402 | |
Provision for current expected credit losses | | 66,100 | | | 905,129 | | 66,100 | |
TRS (income) loss | | | (61,071 | ) | | - | |
One-time events pursuant to changes in GAAP and certain non-cash charges | | | - | | | | - | | | - | |
Distributable Earnings | | $ | 3,210,372 | | | $ | 11,915,358 | | $ | 3,210,372 | |
Adjustments to Distributable Earnings | | | | |
Organizational expense | | | - | | |
Adjusted Distributable Earnings | | $ | 3,210,372 | | |
Basic weighted average shares of common stock outstanding (in shares) | | | 7,144,670 | | | | 19,319,993 | | | 7,144,670 | |
Adjusted Distributable Earnings per weighted Average Share | | $ | 0.45 | | |
Distributable Earnings per Basic Weighted Average Share | | | $ | 0.62 | | $ | 0.45 | |
Book Value Per Share
We believe that book value per share is helpful to stockholdersshareholders in evaluating our growth as we scale our equity capital base and continue to invest in our target investments. The book value per share of our common stock as of March 31, 20212022 and December 31, 20202021 was approximately $16.18$17.04 and $14.83, respectively, on a post-split basis.$16.61, respectively.
Dividends Declared Per Share
InFor the period ended March 31, 2022 and year ended December 2020, we declared a seven-for-one stock split in the form of a stock dividend, pursuant to which six additional shares of our common stock were issued for each outstanding share of our common stock, payable on January 25, 2021 to each stockholder of record as of the close of business on January 21, 2021 out of our authorized but unissued shares of common stock.
In March31, 2021, we declared a regularpaid the following cash dividend of $0.36 per share of our common stock, relating to the first quarter of 2021which was paid on March 31, 2021 to stockholders of record as of March 15, 2021. The aggregate amount of the regular cash dividend payment was approximately $2.2 million. The payment of this dividend is not indicative of our ability to pay such dividends in the future.dividends:
In May 2021, we declared a regular cash dividend of $0.38 per share of our common stock, relating to the second quarter of 2021 which will be paid on June 30, 2021 to stockholders of record as of June 15, 2021. The aggregate amount of the regular cash dividend payment will be approximately $5.1million. The payment of this dividend is not indicative of our ability to pay such dividends in the future.
23
Factors Impacting our Operating Results
The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest income,margin, the market value of our assets and the supply of, and demand for, commercial real estate debt and other financial assets in the marketplace. Our net interest income,margin, which includes the accretion and amortization of OID, is recognized based on the contractual rate and the outstanding principal balance of the loans we originate. Interest rates will vary according to the type of loan, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, some of which cannot be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers.
Results of Operations
We commenced operations on July 31, 2020 and therefore, have noThe comparative period to compare results for the three months ended March 31, 2021. We are currently in2022 is the process of investingthree months ended March 31, 2021 (the “Prior Period”).
For the proceeds of our IPO. Results for the initial period of our operations are not indicative of the results we expect when our investment strategy has been fully implemented.three months ended March 31, 2022 and 2021
Our net income allocable to our common stockholders for the three months ended March 31, 20212022 was approximately $10.2 million or $0.53 per basic weighted average common share, respectively, compared to net income allocable to our common stockholders of $1.4 million or $0.20 per basic weighted average common share. Netshare for the three months ended March 31, 2021.
Interest income ofincreased approximately $1.4$13.9 million, was comprised offrom approximately $4.7 million in total revenues, operating expenses of approximately $0.6 million, stock-based compensation expense of approximately $1.6 million, management and incentive fees of approximately $0.9 million, change in the provision for current expected credit losses of approximately $0.1 million and a net change in unrealized gain on loans of approximately $0.1 million.
Investments in loans held at fair value are recorded on the trade date at cost, which reflects the amount of principal funded net of any original issue discounts. An unrealized gain arises when the value the loan portfolio exceeds its cost and an unrealized loss arises when the value of the loan portfolio is less than its cost. The net change in unrealized gain of approximately $0.1 million for the three months ended March 31, 2021, to approximately $18.6 million for the three months ended March 31, 2022. This increase was mainlyprimarily due to an increase in principal outstanding of approximately $98.4 million at March 31, 2021 to $373.7 million at March 31, 2022.
Interest expense increased approximately $1.7 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. This increase was due to interest expense incurred and amortization of deferred financing costs relating to our AFCF Revolving Credit Facility, which was amended in November 2021, and our 2027 Senior Notes that were issued in November 2021.
General and administrative expenses increased approximately $0.7 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. This increase was primarily due to an increase in expenses relating to personnel, overhead, and occupancy costs as the Company continues to expand.
Management fees increased approximately $0.7 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. This increase was primarily due to an increase in the Company’s Equity from approximately $216.3 million to $336.5 million and partially offset by a change in the management fee rate upon our IPO from 0.4375% to 0.375% post-IPO. Incentive fees increased by approximately $2.3 million from approximately $0.7 million to $3.0 million for the three months ended March 31, 2022 and 2021, respectively. This increase was driven by the net changeincrease in Core Earnings as defined in the valuation of the loans.Management Agreement.
Provision for Current Expected Credit Losses
For the three months ended March 31, 2021, we incurred fees payable to our manager for a Base Management Fee of $213,932, which was net of a Base Management Fee Rebate of $237,743. The Incentive Compensation fee payable to our manager for the three months ended March 31, 2021 was $662,730.
For the three months ended March 31, 2021, our Manager will be reimbursed for approximately $365,567 for out-of-pocket costs incurred on our behalf.
Provision for Current Expected Credit Losses
For the three months ended March 31, 2021,2022, the increase to our provision for current expected credit loss was $66,100approximately $0.9 million and the balance as of March 31, 20212022 was $531,497approximately $4.0 million or 125150 basis points of our total loans held at carrying value and loans receivable at carrying value commitment balance of $42,393,791approximately $267.4 million and was bifurcated between (i) the current expected credit loss reserve (contra-asset) related to outstanding balances on loans held at carrying value and loans receivable at carrying value of $248,317approximately $3.4 million and (ii) a liability for unfunded commitments of $283,180.approximately $0.6 million. For the three months ended March 31, 2021, the increase to our provision for current expected credit loss was approximately $0.1 million and the balance as of March 31, 2021 was approximately $0.5 million or 125 basis points of our total loans held at carrying value and loans receivable at carrying value balance of approximately $42.4 million and was bifurcated between (i) the current expected credit loss reserve (contra-asset) related to outstanding balances on loans held at carrying value and loans receivable at carrying value of approximately $0.2 million and (ii) a liability for unfunded commitments of approximately $0.3 million. The liability is based on the unfunded portion of loan commitments over the full contractual period over which we are exposed to credit risk through a current obligation to extend credit. Management considered the likelihood that funding will occur, and if funded, the expected credit loss on the funded portion. We continuously evaluate the credit quality of each loan by assessing the risk factors of each loan. The increase in the provision for current expected credit losses for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 is primarily due to changes in macroeconomic factors, changes to the loan portfolio including new commitments and repayments, and changes in other datapoints we use in estimating the reserve.
Loan Portfolio
As of March 31, 20212022 and December 31, 2020, the Company’s2021, our portfolio included fourthree loans respectively, held at fair value. The aggregate originated commitment under these loans was approximately $62.4$96.2 million and $59.9$75.9 million as of March 31, 2022 and December 31, 2021, respectively, and outstanding principal was approximately $52.2$95.6 million and $50.8$77.6 million respectively, as of March 31, 20212022 and December 31, 2020.2021, respectively. For the three months ended March 31, 2021, the Company2022, we funded approximately $1.0$17.3 million of outstanding principal. Asadditional principal of March 31, 2021 and December 31, 2020, approximately 0% and 6.0%, respectively, of the Company’s loans held at fair value haveand we had no repayments of loans held at fair value. As of March 31, 2022 and December 31, 2021, none of our loans held at fair value had floating interest rates. As of December 31, 2020, these floating rates were subject to LIBOR floors, with a weighted average floor of 2.5%, calculated based on loans with LIBOR floors. References to LIBOR or “L” are to 30-day LIBOR (unless otherwise specifically stated).
The following tables summarize the Company’sour loans held at fair value as of March 31, 20212022 and December 31, 2020:2021:
| | As of March 31, 2021 | | | As of March 31, 2022 | |
| | Fair Value (2) | | | Carrying Value (1) | | | Outstanding Principal (1) | | | Weighted Average Remaining Life (Years)(3) | | | Fair Value (1) | | | Carrying Value (2) | | | Outstanding Principal (2) | | | Weighted Average Remaining Life (Years)(3) | |
| | | | | | | | | | | | | | | | | | |
Senior Term Loans | | $ | 50,252,049 | | $ | 48,833,111 | | $ | 52,212,608 | | | 3.1 | | |
Senior term loans | | | $ | 95,072,832 | | $ | 92,808,827 | | $ | 95,618,815 | | | 2.0 | |
Total loans held at fair value | | $ | 50,252,049 | | $ | 48,833,111 | | $ | 52,212,608 | | | 3.1 | | | $ | 95,072,832 | | $ | 92,808,827 | | $ | 95,618,815 | | | 2.0 | |
| | As of December 31, 2020 | | | As of December 31, 2021 | |
| | Fair Value (2) | | | Carrying Value (1) | | | Outstanding Principal (1) | | | Weighted Average Remaining Life (Years)(3) | | | Fair Value (1) | | | Carrying Value (2) | | | Outstanding Principal (2) | | | Weighted Average Remaining Life (Years)(3) | |
| | | | | | | | | | | | | | | | | | |
Senior Term Loans | | $ | 48,558,051 | | $ | 46,994,711 | | $ | 50,831,235 | | | 3.3 | | |
Senior term loans | | | $ | 77,096,319 | | $ | 74,913,157 | | $ | 77,630,742 | | | 2.2 | |
Total loans held at fair value | | $ | 48,558,051 | | $ | 46,994,711 | | $ | 50,831,235 | | | 3.3 | | | $ | 77,096,319 | | $ | 74,913,157 | | $ | 77,630,742 | | | 2.2 | |
(1) | Refer to Note 14 to our unaudited interim consolidated financial statements titled “Fair Value.” |
(2) | The difference between the Carrying Valuecarrying value and the Outstanding Principaloutstanding principal amount of the loans consists of unaccreted purchase discount, deferred loan feesOID and loan origination costs. |
(2) | Refer to Footnote 14 to our unaudited financial statements included elsewhere in this quarterly report. |
(3) | Weighted average remaining life is calculated based on the fair value of the loans as of March 31, 20212022 and December 31, 2020. 2021. |
The following table presents changes in loans held at fair value as of and for the three months ended March 31, 2021:2022:
| | Principal | | | Original Issue Discount | | | Unrealized Gains / (Losses) | | | Fair Value | |
| | | | | | | | | | | | |
Total loans held at fair value at December 31, 2020 | | $ | 50,831,235 | | | $ | (3,836,524 | ) | | $ | 1,563,340 | | | $ | 48,558,051 | |
Change in unrealized gains / (losses) on loans at fair value, net | | | - | | | | - | | | | (144,402 | ) | | | (144,402 | ) |
New fundings | | | 992,000 | | | | (142,982 | ) | | | - | | | | 849,018 | |
Accretion of original issue discount | | | - | | | | 600,009 | | | | - | | | | 600,009 | |
PIK Interest | | | 389,373 | | | | - | | | | - | | | | 389,373 | |
Total loans held at fair value at March 31, 2021 | | $ | 52,212,608 | | | $ | (3,379,497 | ) | | $ | 1,418,938 | | | $ | 50,252,049 | |
| | Principal | | | Original Issue Discount | | | Unrealized Gains (Losses) | | | Fair Value | |
| | | | | | | | | | | | |
Total loans held at fair value at December 31, 2021 | | $ | 77,630,742 | | | $ | (2,717,584 | ) | | $ | 2,183,161 | | | $ | 77,096,319 | |
Change in unrealized gains (losses) on loans at fair value, net | | | - | | | | - | | | | 80,843 | | | | 80,843 | |
New fundings | | | 17,285,000 | | | | (429,275 | ) | | | - | | | | 16,855,725 | |
Accretion of original issue discount | | | - | | | | 336,872 | | | | - | | | | 336,872 | |
PIK interest | | | 703,073 | | | | - | | | | - | | | | 703,073 | |
Total loans held at fair value at March 31, 2022 | | $ | 95,618,815 | | | $ | (2,809,987 | ) | | $ | 2,264,004 | | | $ | 95,072,832 | |
As of March 31, 20212022 and December 31, 2020, the Company’s2021, our portfolio included fourzero and one investments in debt securities, respectively, held at fair value. We sold our investment in debt securities in the first quarter of 2022 for approximately $15.9 million, which was previously designated as available-for-sale as of December 31, 2021. For the period ended March 31, 2022 and 2021, the realized loss on the sale of marketable securities was approximately $0.2 million and $0.0 million, respectively.
We did not hold any investments in debt securities as of March 31, 2022.
The following table summarizes our debt securities held at fair value as of March 31, 2022 and December 31, 2021.
| | As of December 31, 2021 | |
| | Fair Value | | | Carrying Value (1) | | | Outstanding Principal (1) | | | Weighted Average Remaining Life (Years) (2) | |
| | | | | | | | | | | | |
Debt securities | | $ | 15,881,250 | | | $ | 16,050,000 | | | $ | 15,000,000 | | | | 2.9 | |
Total debt securities held at fair value | | $ | 15,881,250 | | | $ | 16,050,000 | | | $ | 15,000,000 | | | | 2.9 | |
(1) | The difference between the carrying value and the outstanding principal amount of the loans consists of unaccreted purchase premium and loan origination costs. |
(2) | Weighted average remaining life is calculated based on the fair value of the loans as of December 31, 2021. |
The following table presents changes in debt securities held at fair value as of and for the three months ended March 31, 2022:
| | Principal | | | Original Issue Discount | | | Unrealized Gains (Losses) | | | Fair Value | |
| | | | | | | | | | | | |
Total debt securities held at fair value at December 31, 2021 | | $ | 15,000,000 | | | $ | 1,050,000 | | | $ | (168,750 | ) | | $ | 15,881,250 | |
Realized gains (losses) on securities at fair value, net | | | - | | | | (150,000 | ) | | | - | | | | (150,000 | ) |
Change in unrealized gains (losses) on securities at fair value, net | | | - | | | | - | | | | 168,750 | | | | 168,750 | |
Sale of loans | | | (15,000,000 | ) | | | (900,000 | ) | | | - | | | | (15,900,000 | ) |
Total debt securities held at fair value at March 31, 2022 | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
As of March 31, 2022 and December 31, 2021, our portfolio included ten and twelve loans, respectively, held at carrying value. The aggregate originated commitment under these loans was approximately $65$319.9 million and $44$324.3 million, respectively, and outstanding principal was approximately $42.9$275.8 million and $33.9$270.8 million, respectively, as of March 31, 20212022 and December 31, 2020.2021. During the three months ended March 31, 2021, the Company2022, we funded approximately $8.9$34.2 million of outstandingadditional principal. As of March 31, 20212022 and December 31, 2020,2021, approximately 49%42% and 35%48%, respectively, of the Company’sour loans held at carrying value have floating interest rates. These floating rates are subject to London Interbank Offered Rate (“LIBOR”)LIBOR floors, with a weighted average floor of 1%1.0% and 1%1.0%, respectively, calculated based on loans with LIBOR floors. References to LIBOR or “L” are to 30-day LIBOR (unless otherwise specifically stated).
The following tables summarize the Company’sour loans held at carrying value as of March 31, 20212022 and December 31, 2020:2021:
| | As of March 31, 2021 | | | As of March 31, 2022 | |
| | Outstanding Principal (1) | | | Original Issue Discount | | | Carrying Value (1) | | | Weighted Average Remaining Life (Years)(2) | | | Outstanding Principal (1) | | | Original Issue Discount | | | Carrying Value (1) | | | Weighted Average Remaining Life (Years)(2) | |
| | | | | | | | | | | | | | | | | | |
Senior Term Loans | | $ | 42,940,850 | | $ | (3,787,914 | ) | | $ | 39,152,936 | | | 4.5 | | |
Senior term loans | | | $ | 275,839,406 | | $ | (10,687,924 | ) | | $ | 265,151,482 | | | 2.9 | |
Total loans held at carrying value | | $ | 42,940,850 | | $ | (3,787,914 | ) | | $ | 39,152,936 | | | 4.5 | | | $ | 275,839,406 | | $ | (10,687,924 | ) | | $ | 265,151,482 | | | 2.9 | |
| | As of December 31, 2020 | | | As of December 31, 2021 | |
| | Outstanding Principal (1) | | | Original Issue Discount | | | Carrying Value (1) | | | Weighted Average Remaining Life (Years)(2) | | | Outstanding Principal (1) | | | Original Issue Discount | | | Carrying Value (1) | | | Weighted Average Remaining Life (Years)(2) | |
| | | | | | | | | | | | | | | | | | |
Senior Term Loans | | $ | 33,907,763 | | $ | (2,070,732 | ) | | $ | 31,837,031 | | | 4.7 | | |
Senior term loans | | | $ | 270,841,715 | | $ | (13,678,219 | ) | | $ | 257,163,496 | | | 3.4 | |
Total loans held at carrying value | | $ | 33,907,763 | | $ | (2,070,732 | ) | | $ | 31,837,031 | | | 4.7 | | | $ | 270,841,715 | | $ | (13,678,219 | ) | | $ | 257,163,496 | | | 3.4 | |
(3)(1) | The difference between the Carrying Valuecarrying value and the Outstanding Principaloutstanding principal amount of the loans consists of unaccreted original issue discountOID and loan origination costs. |
(4)(2) | Weighted average remaining life is calculated based on the carrying value of the loans as of March 31, 20212022 and December 31, 2020. 2021. |
The following table presents changes in loans held at carrying value as of and for the three months ended March 31, 2021:2022:
| | Principal | | | Original Issue Discount | | | Carrying Value | |
| | | | | | | | | |
Total loans held at carrying value at December 31, 2020 | | $ | 33,907,763 | | | $ | (2,070,732 | ) | | $ | 31,837,031 | |
New Fundings | | | 8,863,455 | | | | (1,824,614 | ) | | | 7,038,841 | |
Accretion of original issue discount | | | - | | | | 107,432 | | | | 107,432 | |
PIK Interest | | | 169,632 | | | | | | | | 169,632 | |
Total loans held at carrying value at March 31, 2021 | | $ | 42,940,850 | | | $ | (3,787,914 | ) | | $ | 39,152,936 | |
| | Principal | | | Original Issue Discount | | | Carrying Value | |
| | | | | | | | | |
Total loans held at carrying value at December 31, 2021 | | $ | 270,841,715 | | | $ | (13,678,219 | ) | | $ | 257,163,496 | |
New fundings | | | 34,245,888 | | | | (638,400 | ) | | | 33,607,488 | |
Accretion of original issue discount | | | - | | | | 3,628,695 | | | | 3,628,695 | |
Loan repayments | | | (20,010,726 | ) | | | - | | | | (20,010,726 | ) |
Sale of loans | | | (10,000,000 | ) | | | - | | | | (10,000,000 | ) |
PIK interest | | | 915,688 | | | | - | | | | 915,688 | |
Loan amortization payments | | | (153,159 | ) | | | - | | | | (153,159 | ) |
Total loans held at carrying value at March 31, 2022 | | $ | 275,839,406 | | | $ | (10,687,924 | ) | | $ | 265,151,482 | |
As of March 31, 20212022 and December 31, 2020, the Company’s2021, our portfolio included one loan receivable at carrying value. The originated commitment under this loan was approximately $4$4.0 million and outstanding principal was approximately $3.2$2.3 million and $3.4$2.5 million as of March 31, 20212022 and December 31, 2020,2021, respectively. During the three months ended March 31, 2021, the Company2022, we received repayments of $0.1 millionapproximately $0.3 of outstanding principal.
The following table presents changes in loans receivable as of and for the three months ended March 31, 2021:2022:
| | Principal | | | Original Issue Discount | | | Carrying Value | | | Principal | | | Original Issue Discount | | | Carrying Value | |
| | | | | | | | | | | | | | |
Total loans receivable at carrying value at December 31, 2020 | | $ | 3,352,176 | | $ | (3,913 | ) | | $ | 3,348,263 | | |
Total loans receivable at carrying value at December 31, 2021 | | | $ | 2,533,266 | | $ | (2,678 | ) | | $ | 2,530,588 | |
Principal repayment of loans | | (107,717 | ) | | - | | (107,717 | ) | | (251,574 | ) | | - | | (251,574 | ) |
Accretion of original issue discount | | | - | | | 309 | | | 309 | | | | - | | | 310 | | | 310 | |
Total loans receivable at carrying value at March 31, 2021 | | $ | 3,244,459 | | $ | (3,604 | ) | | $ | 3,240,855 | | |
Total loans receivable at carrying value at March 31, 2022 | | | $ | 2,281,692 | | $ | (2,368 | ) | | $ | 2,279,324 | |
The below table summarizes our total loan portfolio as of March 31, 2021,2022:
Loan Names | Status | | Original Funding Date(1) | | Loan Maturity | | AFCG Loan, net of Syndication | | | % of Total AFCG | | | Principal Balance as of 3/31/2022 | | | Cash Interest Rate | | | PIK | | Fixed/ Floating | Amortization During Term | | YTM (2)(3) | |
Public Co. A - Real Estate Loan | Funded | | 7/3/2019 | | 1/26/2023 | | $ | 2,940,000 | | | | 0.7 | % | | $ | 2,994,612 | | | | 10.0 | % | | | 4.0 | % | Fixed | No | | | 19 | % |
Public Co. A - Equipment Loans | Funded | | 8/5/2019 | | 3/5/2024 | | | 4,000,000 | | | | 0.9 | % | | | 2,281,692 | | | | 12.0 | % | | | N/A | | Fixed | Yes | | | 19 | % |
Private Co. A(4) | Funded | | 5/8/2020 | | 5/8/2024 | | | 77,785,000 | | | | 18.5 | % | | | 79,744,238 | | | | 12.8 | % | | | 2.7 | % | Fixed | Yes | | | 22 | % |
Private Co. B | Funded | | 9/10/2020 | | 9/1/2023 | | | 15,500,000 | | | | 3.7 | % | | | 12,879,965 | | | | 13.0 | % | | | 4.0 | % | Fixed | Yes | | | 28 | % |
Private Co. C | Funded | | 11/5/2020 | | 12/1/2025 | | | 24,000,000 | | | | 5.7 | % | | | 24,910,301 | | | | 13.0 | % | | | 4.0 | % | Floating | Yes | | | 23 | % |
Private Co. D | Funded | | 12/23/2020 | | 1/1/2026 | | | 12,000,000 | | | | 2.9 | % | | | 12,138,516 | | | | 13.0 | % | | | 2.0 | % | Fixed | Yes | | | 21 | % |
Private Co. F | Funded | | 4/27/2021 | | 5/1/2026 | | | 13,000,000 | | | | 3.1 | % | | | 12,811,265 | | | | 13.0 | % | | | 4.0 | % | Fixed | Yes | | | 28 | % |
Sub of Private Co. G(5) | Funded | | 4/30/2021 | | 5/1/2026 | | | 65,400,000 | | | | 15.6 | % | | | 50,398,476 | | | | 12.5 | % | | | 1.8 | % | Floating | Yes | | | 21 | % |
Sub of Private Co. H(6) | Funded | | 5/11/2021 | | 5/11/2023 | | | 5,781,250 | | | | 1.4 | % | | | 5,781,250 | | | | 15.0 | % | | | N/A | | Fixed | No | | | 20 | % |
Public Co. F(5) | Funded | | 5/21/2021 | | 5/30/2023 | | | 86,600,000 | | | | 20.6 | % | | | 86,600,000 | | | | 8.6 | % | | | N/A | | Fixed | No | | | 11 | % |
Private Co. I | Funded | | 7/14/2021 | | 8/1/2026 | | | 10,326,875 | | | | 2.4 | % | | | 10,490,497 | | | | 13.0 | % | | | 2.5 | % | Floating | Yes | | | 21 | % |
Private Co. K | Funded | | 8/20/2021 | | 8/3/2026 | | | 19,750,000 | | | | 4.7 | % | | | 7,000,000 | | | | 13.0 | % | | | N/A | | Floating | Yes | | | 18 | % |
Private Co. J | Funded | | 8/30/2021 | | 9/1/2025 | | | 23,000,000 | | | | 5.5 | % | | | 23,209,100 | | | | 13.0 | % | | | 2.0 | % | Floating | Yes | | | 20 | % |
Sub of Public Co. H | Funded | | 12/16/2021 | | 1/1/2026 | | | 60,000,000 | | | | 14.3 | % | | | 42,500,000 | | | | 9.8 | % | | | N/A | | Fixed | No | | | 14 | % |
| | | | | SubTotal | | $
| 420,083,125 | | | | 100.0 | %
| | $
| 373,739,912 | | | | 11.5 | %
| | | 1.7
| %
| | | | | 19
| %
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Wtd Average | |
Information is as of March 31, 2022 unless otherwise specified.
Loan Names | | Status | | Original Funding Date(1) | | Loan Maturity | | Total Loan | | | % of Total AFCG | | | Principal Balance as of 3/31/2021 | | | Cash Interest Rate | | | Paid In Kind ("PIK") | | | Fixed/ Floating | | Amortization During Term | | YTM (2) | |
Public Co. A - Real Estate Loan(3) | | Funded: | | 7/3/2019 | | 1/26/2023 | | $ | 2,940,000 | | | | 2.3 | % | | $ | 2,945,479 | | | | 12.0 | % | | | 2.0 | % | | Fixed | | No | | | 20
| % |
Public Co. A - Equipment Loan(3) | | Funded: | | 8/5/2019 | | 3/5/2024 | | | 4,000,000 | | | | 3.1 | % | | | 3,244,459 | | | | 12.0 | % | | | N/A | | | Fixed | | Yes | | | 17 | % |
Sub. of Public Co. C(4)(5) | | Funded: | | 2/12/2020 | | 2/18/2025 | | | 15,000,000 | | | | 11.7 | % | | | 12,046,801 | | | | 16.8 | % | | | 3.0 | % | | Fixed | | Yes | | | 49. | % |
Private Co. A | | Funded: | | 5/8/2020 | | 5/8/2024 | | | 34,000,000 | | | | 26.5 | % | | | 34,672,331 | | | | 13.0 | % | | | 4.0 | % | | Fixed | | Yes | | | 24 | % |
Private Co. B | | Funded: | | 9/10/2020 | | 9/1/2023 | | | 10,500,000 | | | | 8.2 | % | | | 2,548,159 | | | | 13.0 | % | | | 4.0 | % | | Fixed | | Yes | | | 26 | % |
Private Co. C | | Funded: | | 11/5/2020 | | 12/1/2025 | | | 22,000,000 | | | | 17.1 | % | | | 13,895,465 | | | | 13.0 | % | | | 4.0 | % | | Floating | | Yes | | | 22 | % |
Sub. of Public Co. D(6) | | Funded: | | 12/18/2020 | | 12/18/2024 | | | 10,000,000 | | | | 7.8 | % | | | 10,000,000 | | | | 12.9 | % | | | N/A | | | Fixed | | No | | | 14 | % |
Private Co. D | | Funded: | | 12/23/2020 | | 1/1/2026 | | | 12,000,000 | | | | 9.3 | % | | | 12,045,385 | | | | 13.0 | % | | | 2.0 | % | | Fixed | | Yes | | | 20
| % |
Private Co. E | | Funded: | | 3/30/2021 | | 4/1/2026 | | | 21,000,000 | | | | 14.0 | % | | | 7,000,000 | | | | 13.0 | % | | | 4.0 | % | | Floating | | Yes | | | 23 | % |
| | | | | | Subtotal | | $ | 131,440,000 | | | | 100.0 | % | | $ | 98,398,079 | | | | 13.4 | % | | | 3.0 | % | | | | | | | 23 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Wtd Average
| |
Borrower names have been kept confidential due to confidentiality agreement obligations.
(1) | All loans originated prior to July 31, 2020 were purchased from an affiliated entity at fair value which approximated accreted and/or amortized cost plus accrued interest on July 31, 2020. |
(1) All loans originated prior to 7/31/2020 were purchased from an affiliated entity at accreted and/or amortized cost plus accrued interest on 7/31/2020.
(2) | Estimated YTM includes a variety of fees and features that affect the total yield, which may include, but is not limited to, OID, exit fees, prepayment fees, unused fees and contingent features. OID is recognized as a discount to the funded loan principal and is accreted to income over the term of the loan. Loans originated before July 31, 2020 were acquired by us, net of unaccreted OID, which we accrete to income over the remaining term of the loan. In some cases, additional OID is recognized from additional purchase discounts attributed to the fair value of equity positions that were separated from the loans prior to our acquisition of such loans. |
(2) Yield to Maturity (“YTM”) includes a variety of fees and features that enhance the total yield, which may include Original Issue Discount (“OID”), exit fees, prepayment fees, extension fees, and unused fees. Original Issue Discount or "OID" is recognized as a discount to the funded loan principal and are accreted to income over the term of the loan. Loans originated before 7/31/2020 were acquired by AFC, net of unaccreted OID, which AFC accretes to income over the remaining term of the loan. In some cases, additional OID is recognized from additional purchase discounts attributed to the fair value of equity positions that were separated from the loans prior to our acquisition of such loans.33
The estimated YTM calculations require management to make estimates and assumptions, including, but not limited to, the timing and amounts of loan draws on delayed draw loans, the timing and collectability of exit fees, and the probability and timing of prepayments.prepayments and the probability of contingent features occurring. For example, certain credit agreements contain provisions pursuant to which certain PIK interest rates and fees earned by us under such credit agreements will decrease upon the satisfaction of certain specified criteria which we believe may improve the risk profile of the applicable borrower. To be conservative, we have not assumed any prepayment penalties or early payoffs in our estimated YTM calculation. Estimated YTM is based on current management estimates and assumptions, which may change. Actual results could differ from those estimates. To be conservative, no prepayment penalties or early payoffs were assumed.estimates and assumptions.
(3) The yield to maturity or “YTM” for Loans Public Co. A - Real Estate Loan, Public Co. A - Equipment Loan, Private Co. A, Private Co. D, Private Co. E is enhanced by purchase discounts attributed to the fair value of equity warrants that were separated from the loans prior to the AFC's acquisition of the Loans. The purchase discounts accrete to income over the remaining term of the loan. Private Co. E equity value is a preliminary value.
(4) Loan includes a $3,000,000 initial funding, of a $15,000,000 loan commitment, which has interest that includes 3% PIK; amortization exceeds PIK. The loan also includes two early advances totaling $9,000,000 against the $15,000,000 total loan commitment, with a 19% interest rate. Statistics shown are for the $15,000,000 loan commitment, except the weighted average interest rate, which is based on the weighted average interest rate currently.
(5) YTM for Sub. Of Public Co. C assumes a repayment date of 4/13/2021. Refer to recent developments for information on the repayment of this loan.
(6) Loan has an optional extension for 364 days, but we do not have to participate in the extension, so it was not included nor assumed.
Illustrative Description of Borrowers:
Public Company A
Single-state cultivator, producer and full-service brand fulfillment partner that produces a wide range of products in the Nevada market. Public Company A operates a +/- 400,000 square foot greenhouse and 55,000 square foot processing and custom packaging facility, which is capable of producing 140,000 pounds of dry flower per year. Public Company A also operates a +/- 25,000 square foot indoor cultivation facility and commercial kitchen. The real estate collateral of Public Company A includes a greenhouse and processing facility in Nevada.
Subsidiary of Public Company C
Single-state vertically-integrated cultivator and retailer with operations in Florida, one of the fastest growing markets in the United States. Operations consist of two greenhouse cultivation facilities, eight dispensaries and a car delivery system to extend its retail network. The real estate collateral of Subsidiary of Public Company C includes two cultivation facilities in Florida.
Private Company A
Multi-state operator with operations in seven states. Private Company A is a vertically integrated cultivator and retailer of both medical and adult-use cannabis that primarily operates under its own brand. Private Company A’s business segments include cultivation, extraction and processing, retail products, and dispensaries. The real estate collateral of Private Company A includes three cultivation facilities across Arizona and Michigan and nine dispensaries across Arizona, Maryland, Massachusetts and Michigan.
Private Company B
Single-state operator currently constructing an indoor cultivation facility to wholesale product to the medical and adult use markets in Michigan. Private Company B produces high-end cannabis strains and intends to focus on the high-end, top-tier cannabis niche. The management team has over 20 years’ experience in the cannabis industry, including ten years in Michigan. The real estate collateral for Private Company B includes a cultivation facility in Michigan.
Private Company C
Single-state vertically integrated cultivator and retailer of medical cannabis. Private Company C operates under a Chapter 20 Clinical Registrant license and has partnered to collaborate on multifaceted studies to substantiate safety and positive therapeutic outcomes. Private Company C currently operates a cultivation facility and three dispensaries with the ability to add three additional dispensary locations. The real estate collateral of Private Company C includes a cultivation facility and dispensary in Pennsylvania.
Subsidiary of Public Company D
Public Company D participates in the medical and adult use market across Canada and in several US states where cannabis has been legalized for therapeutic or adult use. Subsidiary of Public Company D is a premier medical marijuana cultivator, processor and distributor in Pennsylvania. Public Company D also has operators in California and New Jersey. The real estate collateral for Subsidiary of Public Company D includes a cultivation facility in Pennsylvania.
Private Company D
Multi-state operator who operates five dispensaries, the maximum number of dispensaries allowed by law for any operator, in the State of Ohio and one dispensary in Arkansas. Private Company D historical focus has been dispensary operations and has licenses in other states, where it also operates dispensaries. The real estate collateral for Private Company D includes two dispensaries in Ohio and one in Arkansas.
27
Borrower | | Status | | Date | | net of Syndication | | | % of Total AFCG | | | Total Funded Debt Issuance | | | AFCG % of the Total Loan | | | Est. Real Estate Value (1) | | | Real Estate Collateral Coverage | | | Implied Real Estate Collateral for AFCG | �� | | AFCG Real Estate Collateral Coverage | |
Public Co. A - Real Estate Loan(2) | | Funded | | 7/3/2019 | | $ | 2,940,000 | | | | 2.3 | % | | $ | 30,000,000 | | | | 9.8 | % | | $ | 72,000,000 | | | | 2.40 | x | | $ | 7,056,000 | | | | 2.40 | x |
Public Co. A - Equipment Loan | | Funded | | 8/5/2019 | | $ | 4,000,000 | | | | 3.1 | % | | $ | 20,000,000 | | | | 20.0 | % | | $ | 0 | | | | 0.00 | x | | $ | 0 | | | | 0.00 | x |
Subsidiary of Public Co. C(3) | | Funded | | 2/12/2020 | | $ | 15,000,000 | | | | 11.7 | % | | $ | 15,000,000 | | | | 100.0 | % | | $ | 30,723,143 | | | | 2.05 | x | | $ | 30,723,143 | | | | 2.05 | x |
Private Co. A(4) | | Funded | | 5/8/2020 | | $ | 34,000,000 | | | | 26.5 | % | | $ | 42,500,000 | | | | 80.0 | % | | $ | 51,339,031 | | | | 1.21 | x | | $ | 41,071,225 | | | | 1.21 | x |
Private Co. B(5) | | Funded | | 9/10/2020 | | $ | 10,500,000 | | | | 8.2 | % | | $ | 10,500,000 | | | | 100.0 | % | | $ | 19,536,098 | | | | 1.86 | x | | $ | 19,536,098 | | | | 1.86 | x |
Private Co. C(6) | | Funded | | 11/5/2020 | | $ | 22,000,000 | | | | 17.1 | % | | $ | 22,000,000 | | | | 100.0 | % | | $ | 23,733,050 | | | | 1.08 | x | | $ | 23,733,050 | | | | 1.08 | x |
Subsidiary of Public Co. D(7) | | Funded | | 12/18/2020 | | $ | 10,000,000 | | | | 7.8 | % | | $ | 120,000,000 | | | | 8.3 | % | | $ | 26,058,332 | | | | 0.22 | x | | $ | 2,171,528 | | | | 0.22 | x |
Private Co. D(8) | | Funded | | 12/23/2020 | | $ | 12,000,000 | | | | 9.3 | % | | $ | 12,000,000 | | | | 100.0 | % | | $ | 7,538,589 | | | | 0.63 | x | | $ | 7,538,589 | | | | 0.63 | x |
Private Co. E(9) | | Funded | | 3/30/2021 | | $ | 21,000,000 | | | | 14.0 | % | | $ | 21,000,000 | | | | 100.0 | % | | $ | 16,102,000 | | | | 0.89 | x | | $ | 16,102,000 | | | | 0.77 | x |
| | | | | | $ | 131,440,000 | | | | 100.0 | % | | $ | 293,000,000 | | | | | | | $ | 247,030,242 | | | | 0.85 | x | | $ | 147,931,632 | | | | 1.13 | x |
(1) Real Estate We calculate our weighted average real estate collateral coverage by estimating the underlying value of our real estate collateral based on appraised value, if available. In addition, if loan funds acquisition and/or construction, figure includes expected total basis on future construction and/or acquisitions plus appraised value.
(2) Public Company A real estate based on cost basis.
(3) Subsidiary of Public Company C real estate based on existing cultivation propertyvarious objective and the completed and stabilized value of the to-be-built facility.
(4) Private Company A real estate based on appraised value plus future basis.
(5) Private Company B real estate based onsubjective factors, including, without limitation, third-party appraisals, total cost basis as completed.of the subject property and/or our own internal estimates.
(6) Private Company C
We may pursue a sale of a defaulted loan if we believe that a sale would yield higher proceeds or that a sale could be accomplished more quickly than a foreclosure proceeding while yielding proceeds comparable to what would be expected from a foreclosure sale. To the extent that we determine that the proceeds are more likely to be maximized through instituting a foreclosure sale or through taking title to the underlying collateral, we will be subject to the rules and regulations under state law that govern foreclosure sales and Nasdaq listing standards that do not permit us to take title to real estate based on total cost basis, as completed.
(7) Subsidiarywhile it is involved in commercial sales of Public Company Dcannabis. In addition, the sale of the collateral securing our loans may be difficult and may be to a party outside of the cannabis industry. Therefore, any appraisal-based value of our real estate based on total cost basis.
(8) Private Company Dand other collateral may not equal the value of such collateral if it were to be sold to a third party in a foreclosure or similar proceeding. We may seek to sell a defaulted loan prior to commencing a foreclosure proceeding or during a foreclosure proceeding to a purchaser that is not required to comply with Nasdaq listing standards. We believe a third-party purchaser that is not subject to Nasdaq listing standards may be able to realize greater value from real estate based on appraised value.
(9) Private Company Eand other collateral securing our loans. However, we can provide no assurances that a third party would buy such loans or that the sales price of such loans would be sufficient to recover the outstanding principal balance, accrued interest, and fees. We will not own real estate based on total cost basis, as completed.long as it is used in the commercial sale of cannabis due to current statutory prohibitions and exchange listing standards, which may delay or limit our remedies in the event that any of our borrowers default under the terms of their loans with us.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and meet other general business needs. We use significant cash to purchase our target investments, repay principal and interest on our borrowings, make distributions to our stockholders and fund our operations. The sources of financing for our target investments are described below.
Our primary sources of cash generally consist of unused borrowing capacity under our Revolving Credit Agreement,financing sources, the net proceeds of future debt or equity offerings, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating results. Our Shelf Registration Statement became effective on April 18, 2022, allowing us to sell, from time to time in one or more offerings, up to $1.0 billion of our securities, including common stock, preferred stock, debt securities, warrants and rights (including as part of a unit) to purchase shares of our common stock or preferred stock. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering. We may also access liquidity through our ATM Program, which was established in April 2022 pursuant to which we may sell, from time to time, up to $75.0 million of our common stock. As of May 9, 2022, no sales of common stock have been made under the ATM program. We expect that our primary sources of financing will be, to the extent available to us, through (a) credit facilities, and (b) public and private offerings of our equity and debt securities.securities, and (c) ATM Program. In the future, we may utilize other sources of financing to the extent available to us. As the cannabis industry continues to evolve and to the extent that additional states legalize cannabis, the demand for capital continues to increase as operators seek to enter and build out new markets. We expect the principal amount of the loans we originate to increase and that we will need to raise additional equity and/or debt funds to increase our liquidity in the near future.
As of March 31, 20212022 and December 31, 2020,2021, all of our cash was unrestricted and totaled approximately $126.8$63.6 million and $9.6$109.2 million, respectively.
28As of March 31, 2022, we believe that our cash on hand, capacity available under our line of credit and cash flows from operations will be sufficient to satisfy the operating requirements of our business through at least the next twelve months.
The sources of financing for our target investments are described below.
Revolving Credit Facility
On April 29, 2022, we entered into Revolving Credit Agreement by and among us, the other loan parties from time-to-time party thereto, the lenders party thereto, and the Lead Arranger, Bookrunner and Agent party thereto, pursuant to which, we obtained a $60.0 million senior-secured revolving credit facility.
The Revolving Credit Facility contains aggregate commitments of $60.0 million from two FDIC-insured banking institutions, which may be increased to up to $100.0 million in aggregate (subject to available borrowing base and additional commitments), and contains a maturity date of April 29, 2025. Interest is payable on the Revolving Credit Facility at the greater of (1) the applicable base rate plus 0.50% and (2) 4.50%, as provided in the Revolving Credit Agreement, payable in cash in arrears. We incurred a one-time commitment fee expense of approximately $0.4 million, which will be amortized over the life of the facility. Commencing on the six-month anniversary of the closing date, the Revolving Credit Facility has an unused line fee of 0.25% per annum, to be paid semi-annually in arrears, which will be included within interest expense in the Company’s consolidated statements of operations.
Our obligations under the Revolving Credit Facility are secured by certain assets of ours comprising of or relating to loan obligations designated for inclusion in the borrowing base. In addition, we are subject to various financial and other covenants, including: (1) liquidity of at least $5.0 million, (2) annual debt service coverage of at least 1.50 to 1.0 and (3) secured debt not to exceed 25% of total consolidated assets of us and our subsidiaries.
Termination of AFC Finance Credit Facility
Pursuant to the terms of the AFCF Revolving Credit Agreement, our revolving credit facility providesas amended, the AFCF Revolving Credit Facility provided revolving loan commitments of up to $50.0$75.0 million and bears interest at a fixed rate of 6%4.75% per annum, payable in cash in arrears. AsFollowing the effective date of eachthe Second Amendment, funds paid to AFC Finance, LLC for interest, commitment fees and unused fees (net of applicable taxes) will go to support charitable foundations.
As of March 31, 20212022 and December 31, 2020, 2021, we did not have anyhad $0.0 million and $75.0 million of borrowings outstanding under our Revolving Credit Agreement.Agreement, respectively. All outstanding borrowings as of December 31, 2021 were repaid in full on January 3, 2022. Future proceeds under the Revolving Credit Agreement are available to fund loans and bridge capital contributions and for general corporate purposes. We did not incur any fees or costs related toIn connection with the originationSecond Amendment of the Revolving Credit Agreement and(“the Second Amendment”), we are not required to pay anyincurred a one-time commitment fees underfee of 0.25%, or $187,500, which is payable in three quarterly installments, beginning in the first quarter of 2022. Following the Second Amendment, the Revolving Credit Agreement.Facility has an unused fee of 0.25% per annum on the undrawn amount of the revolving loan commitments, to be paid quarterly in arrears. Our obligations under the Revolving Credit Agreement and the other loan documents delivered in connection therewith are secured by a first priority security interest in substantially all of our existing and future assets. The maturity date of the Revolving Credit Agreement is the earlier of (i) December 31, 2021September 30, 2022 and (ii) a Refinancing Credit Facility. The Revolving Credit Agreement provides for certain covenants, including requiring us to deliver financial information and any notices of default, and conducting business in the normal course. To the best of our knowledge, as of March 31, 2021,2022, we were in compliance in all material respects with all covenants contained in our Revolving Credit Agreement. In addition, the Revolving Credit Agreement contains customary events of default. In the case of an event of default, the lenderslender may terminate the commitments under the secured revolving credit facility and require immediate repayment of all outstanding borrowings. Such termination and acceleration would occur automatically in the event of certain bankruptcy events.events.
On April 29, 2022, upon our entry into the Revolving Credit Facility, we terminated the AFCF Revolving Credit Agreement.
2027 Senior Notes
On November 3, 2021, we issued $100.0 million in aggregate principal amount of the 2027 Senior Notes. The 2027 Senior Notes accrue interest at a rate of 5.75% per annum. Interest on the 2027 Senior Notes is due semi-annually on May 1 and November 1 of each year, beginning on May 1, 2022. The net proceeds from the issuance of the 2027 Senior Notes were approximately $97.0 million, after deducting the initial purchasers’ discounts and commissions and estimated offering fees and expenses payable by us. We intend to use the net proceeds from the issuance of the 2027 Senior Notes (i) to fund loans related to unfunded commitments to existing borrowers, (ii) to originate and participate in commercial loans to companies operating in the cannabis industry that are consistent with our investment strategy and (iii) for working capital and other general corporate purposes. The terms of the 2027 Senior Notes are governed by the Indenture. Under the Indenture governing the 2027 Senior Notes, we are required to cause all of our existing and future subsidiaries to guarantee the 2027 Senior Notes, other than certain immaterial subsidiaries as set forth in the Indenture. As of March 31, 2022, the 2027 Senior Notes are not guaranteed by any of our subsidiaries.
Prior to February 1, 2027, we may redeem the 2027 Senior Notes at any time, in whole or from time to time in part, at a redemption price equal to the greater of 100% of the principal amount thereof or a make-whole premium set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. On or after February 1, 2027, we may redeem the 2027 Senior Notes in whole or in part at a price equal to 100% of the principal amount of the 2027 Senior Notes being redeemed, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. The Indenture also requires us to offer to purchase all of the 2027 Senior Notes at a purchase price equal to 101% of the principal amount of the 2027 Senior Notes, plus accrued and unpaid interest if a “change of control triggering event” (as defined in the Indenture) occurs.
The Indenture governing the 2027 Senior Notes contains customary terms and restrictions, subject to a number of exceptions and qualifications, including restrictions on our ability to (1) incur additional indebtedness unless the Annual Debt Service Charge (as defined in the Indenture) is no less than 1.5 to 1.0, (2) incur or maintain total debt in an aggregate principal amount greater than 60% of our consolidated Total Assets (as defined in the Indenture), (3) incur or maintain secured debt in an aggregate principal amount greater than 25% of our consolidated Total Assets (as defined in the Indenture); and (4) merge, consolidate or sell substantially all of our assets. In addition, the Indenture also provides for customary events of default. If any event of default occurs, any amount then outstanding under the Indenture may immediately become due and payable. These events of default are subject to a number of important exceptions and qualifications set forth in the Indenture. We were in compliance with the terms of the Indenture as of the date of this quarterly report.
The table below sets forth the material terms of our outstanding senior notes as of the date of this quarterly report:
Senior Notes | Issue Date | Amount Outstanding | | Interest Rate Coupon | | Maturity Date | Interest Due Dates | Optional Redemption Date |
2027 Senior Notes | November 3, 2021 | $100.0 million | | | 5.75% |
| May 1, 2027 | May 1 and November 1 | February 1, 2027 |
Other Credit Facilities, Warehouse Facilities and Repurchase Agreements
In the future, we may also use other sources of financing to fund the origination or acquisition of our target investments, including other credit facilities and other secured and unsecured forms of borrowing. These financings may be collateralized or non-collateralized and may involve one or more lenders. We expect that these facilities will typically have maturities ranging from two to five years and may accrue interest at either fixed or floating rates.
Debt Service
As of March 31, 2022, we believe that our cash on hand, capacity available under our Revolving Credit Facility, and cash flows from operations will be sufficient to service our outstanding debt during the next twelve months.
Capital Markets
We may seek to raise further equity capital and issue debt securities in order to fund our future investments in loans.
Cash Flows
The following table sets forth changes in cash, cash equivalents and restricted cash for the three months ended March 31, 2022 and 2021:
| | For the three months ended March 31, 2021 | |
Net Income | | $ | 1,400,755 | |
Adjustments to reconcile net income to net cash provided by / (used in) operating activities and changes in operating assets and liabilities | | | 970,030 | |
Net cash provided by operating activities | | | 2,370,785 | |
Net cash used in investing activities | | | (6,885,056 | ) |
Net cash provided by financing activities | | | 121,684,423 | |
Change in cash, cash equivalents and restricted cash | | $ | 117,170,152 | |
| | Three months ended March 31, | |
| | 2022 | | | 2021 | |
Net Income | | $ | 10,162,120 | | | $ | 1,400,755 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities and changes in operating assets and liabilities | | | (5,496,773 | ) | | | 970,030 | |
Net cash provided by (used in) operating activities | | | 4,665,347 | | | | 2,370,785 | |
Net cash provided by (used in) investing activities | | | (30,047,753 | ) | | | (6,885,056 | ) |
Net cash provided by (used in) financing activities | | | (20,248,463 | ) | | | 121,684,423 | |
Change in cash and cash equivalents | | $ | (45,630,869 | ) | | $ | 117,170,152 | |
Net Cash Provided by (Used in) Operating Activities
ForNet cash provided by operating activities during the three months ended March 31, 2021, net cash provided by operating activities totaled2022 was approximately $4.7 million, compared to approximately $2.4 million for the same period in 2021. The increase from March 31, 2021 to March 31, 2022 was primarily due to an increase in net income of approximately $8.8 million, increase in accrued interest of approximately $1.4 million, offset by an increase in accretion of OID of approximately $(3.3) million, increase in PIK interest of approximately $(1.1) million, and decrease in the interest reserve balance of approximately $(4.1) million. For
Net Cash Provided by (Used in) Investing Activities
Net cash used in investing activities during the three months ended March 31, 2021, adjustments2022 was approximately $30.0 million, compared to net income related to operating activitiesapproximately $6.9 million for the same period in 2021. The change was caused primarily included net change in unrealized gain on loans at fair valueby loan issuance and fundings of approximately $50.5 million in this period versus the Prior Period of approximately $7.1 million, offset by repayment of loans of approximately $20.4 million this period versus $0.1 million stock-based compensation expense of approximately $1.6 million, PIK interest of approximately $0.6 million, accretion of deferred loan original issue discount and other discounts of approximately $0.7 million and change in other assets and liabilities of approximately $0.7 million.the Prior Period, respectively.
Net Cash UsedProvided by (Used in) Financing Activities
Net cash used in Investing Activities
Forfinancing activities during the three months ended March 31, 2021, net cash used in investing activities totaled2022 was approximately $6.9 million. The net cash used in investing activities was primarily a result of the cash used for the origination and funding of loans held for investment of approximately $7.1$20.2 million, exceeding the cash received from principal repayment of loans held for investment of approximately $0.1 million and cash received from the sale of Assigned Rights of approximately $0.1 million for the three months ended March 31,2021.
Net Cash Provided by Financing Activities
For the three months ended March 31, 2021,compared to net cash provided by financing activities totaledof approximately $121.7 million and related tofor the same period in 2021. The change was caused primarily by the change in proceeds from the issuancesale of our common stock in our IPO of approximately $123.9 million, less approximately $2.2$63.9 million in dividends paid.this period versus approximately $127.0 million in the Prior Period as well as the repayments on the Revolving Credit Facility of approximately $75.0 million in the current period, versus $0 in the Prior Period.
Contractual Obligations, and Other Commitments, and Off-Balance Sheet Arrangements
Our contractual obligations as of March 31, 20212022 and December 31, 20202021 are as follows:
| | As of March 31, 2021 | | | As of March 31, 2022 | |
| | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | Total | | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | Total | |
Unfunded Commitments | | $
| 33,469,664 | | | - | | | - | | | - | | $
| 33,469,664 | | |
Unfunded commitments | | | $ | 49,438,020 | | | - | | | - | | | - | | $ | 49,438,020 | |
Total | | $
| 33,469,664 | | | - | | | - | | | - | | $
| 33,469,664 | | | $ | 49,438,020 | | | - | | | - | | | - | | $ | 49,438,020 | |
| | As of December 31, 2020 | | | As of December 31, 2021 | |
| | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | Total | | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | Total | |
Unfunded Commitments | | $
| 19,825,119 | | | | - | | | | - | | | | - | | | $
| 19,825,119 | | |
Unfunded commitments | | | $ | 55,538,620 | | | - | | | - | | | - | | $ | 55,538,620 | |
Total | | $
| 19,825,119 | | | | - | | | | - | | | | - | | | $
| 19,825,119 | | | $ | 55,538,620 | | | - | | | - | | | - | | $ | 55,538,620 | |
As of March 31, 20212022 and December 31, 2020,2021, all unfunded commitments relate to our total loan commitments and were dueavailable for funding in less than one year.
The Company also had the following contractual obligations as of March 31, 2022 and December 31, 2021 relating to the senior unsecured notes:
| | As of March 31, 2022 | |
| | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | | | Total | |
Contractual obligations (1) | | $ | 7,634,722 | | | $ | 11,500,000 | | | $ | 11,500,000 | | | $ | 100,958,333 | | | $ | 131,593,056 | |
Total | | $ | 7,634,722 | | | $ | 11,500,000 | | | $ | 11,500,000 | | | $ | 100,958,333 | | | $ | 131,593,056 | |
| | As of December 31, 2021 | |
| | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | | | Total | |
Contractual obligations (1) | | $ | 5,718,056 | | | $ | 11,500,000 | | | $ | 11,500,000 | | | $ | 102,875,000 | | | $ | 131,593,056 | |
Total | | $ | 5,718,056 | | | $ | 11,500,000 | | | $ | 11,500,000 | | | $ | 102,875,000 | | | $ | 131,593,056 | |
(1) | Amounts include projected interest payments during the period based on interest rates in effect as of March 31, 2022 and December 31, 2021, respectively. |
We may enter into certain contracts that may contain a variety of indemnification obligations. The maximum potential future payment amountamounts we could be required to pay under these indemnification obligations may be unlimited.
Off-Balance Sheet Arrangements
Off-balance sheet commitments consist of unfunded commitments on delayed draw loans. Other than as set forth in this quarterly report on Form 10-Q, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, special purpose entities or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities.
Leverage Policies
We currently do not intend to have leverage of more than one times equity and intend to have substantially less drawn on any revolving credit agreements than available commitments under those agreements. AlthoughWhile we are not required to maintain any particularour leverage ratio in compliance with the 2027 Senior Notes Indenture, we expect to employ prudent amounts of leverage and, when appropriate, to use debt as a means of providing additional funds for the acquisition of loans, to refinance existing debt or for general corporate purposes. Leverage is primarily used to provide capital for forward commitments until additional equity is raised or additional medium- to long-term financing is arranged. This policy is subject to change by management and our Board.
Dividends
We will electhave elected to be taxed as a REIT for United States federal income tax purposes and, as such, anticipateintend to annually distributingdistribute to our stockholders at least 90% of our REIT taxable income, prior to the deduction for dividends paid and excluding our net capital gain. If we distribute less than 100% of our REIT taxable income in any tax year (taking into account any distributions made in a subsequent tax year under Sections 857(b)(9) or 858 of the Internal Revenue Code of 1986, as amended (the “Code”))Code), we will pay tax at regular corporate rates on that undistributed portion. Furthermore, if we distribute less than the sum of (i) 85% of our ordinary income for the calendar year, (ii) 95% of our capital gain net income for the calendar year and (iii) any undistributed shortfall from itsour prior calendar year (the “Required Distribution”) to our stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then we are required to pay non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed. Any of these taxes would decrease cash available for distribution to our stockholders. The 90% distribution requirement does not require the distribution of net capital gains. However, if we elect to retain any of our net capital gain for any tax year, we must notify our stockholders and pay tax at regular corporate rates on the retained net capital gain. The stockholders must include their proportionate share of the retained net capital gain in their taxable income for the tax year, and they are deemed to have paid the REIT’s tax on their proportionate share of the retained capital gain. Furthermore, such retained capital gain may be subject to the nondeductible 4% excise tax. If we determine that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend distributions (including capital gains dividends) for the current year from such income, we will accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned.
To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may be required to fund distributions from working capital or through equity, equity-related or debt financings or, in certain circumstances, asset sales, as to which our ability to consummate transactions in a timely manner on favorable terms, or at all, cannot be assured, or we may make a portion of the Required Distribution in the form of a taxable stock distribution or distribution of debt securities.
Any future determination to actually pay dividends or other distributions will be at the discretion of our Board, subject to compliance with applicable law and any contractual provisions, including under agreements for indebtedness we may incur, that restrict or limit our ability to pay dividends, and will depend upon, among other factors, our results of operations, financial condition, earnings, capital requirements, the annual distribution requirements under the REIT provisions of the Code, our REIT taxable income and other factors that our Board deems relevant. Under the Maryland General Corporation Law, we generally may only pay a dividend or other distribution if, after giving effect to the distribution, we would be able to pay our indebtedness as it becomes due in the usual course of business and our total assets exceed our total liabilities.
Critical Accounting Policies and Estimates
As of March 31, 2021,2022, there were no significant changes in or changes in the application of our critical accounting policies or estimates from those presented in the Final Prospectus.our Annual Report on Form 10-K.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to market risks in the ordinary course of our business. These risks primarily relate to fluctuations in interest rates. Our loans are typically valued using a yield analysis, which is typically performed for non-credit impaired loans to borrowers. Changes in market yields may change the fair value of certain of our loans. Generally, an increase in market yields may result in a decrease in the fair value of certain of our loans, however this is mitigated to the extent our loans bear interest at a floating rate. As of March 31, 2021,2022, a decrease of 50 bps or increase of 50 bps of the market yield would have resulted in a change in unrealized gain / (loss) of approximately $0.3$0.5 million and $0.5$(0.5) million, respectively. As of March 31, 2021,2022, we had twofive floating-rate loans, representing approximately 21%31% of our loan portfolio based on aggregate outstanding principal balances, subject to a weighted average LIBOR floor of approximately 1.0% with LIBOR quoted as 0.11%0.452%. We estimate that a hypothetical 100 basis points increase in LIBOR would result in an increase in annual interest income of approximately $23,221$0.5 million and a decrease in LIBOR would not affect our interest income due to the LIBOR floor on our loans. This assumes that the weighted average LIBOR floor of our floating-rate loans remains at approximately 1.0%.
Potential Impact of LIBOR Transition
The Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rate, or LIBOR, has announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. However, for U.S dollar LIBOR, the relevant date has been deferred to at least June 30, 2023 for certain tenors (including overnight and one, three, six and 12 months), at which time the LIBOR administrator has indicated that it intends to cease publication of U.S. dollar LIBOR. Despite this deferral, the LIBOR administrator has advised that no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021. These actions indicate that the continuation of U.S. LIBOR on the current basis cannot and will not be guaranteed after June 30, 2023. Moreover, it is possible that U.S. LIBOR will be discontinued or modified prior to June 30, 2023.
As of March 31, 2020, two2022, five of our loans, representing approximately 21%31% of our loan portfolio based on aggregate outstanding principal balances, paid interest at a variable rate tied to LIBOR. If LIBOR is no longer available, our applicable loan documents generally allow us to choose a new index based upon comparable information. However, if LIBOR is no longer available, we may need to renegotiate some of our agreements to determine a replacement index or rate of interest. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined and any changes to benchmark interest rates could increase our financing costs, which could impact our results of operations, cash flows and the market value of our loans. In addition, the elimination of LIBOR and/or changes to another index could result in mismatches with the interest rate of loans that we are financing.
Changes in Fair Value of Our Assets
We generally hold our target investments as long-term loans; however, we may occasionally classify some of our loans as held for sale. We may carry our loans at fair value or carrying value in our consolidated balance sheet. As of March 31, 20212022 and December 31, 2020, respectively, four2021, three of our loans held for investment were carried at fair value within loans held at fair value in our consolidated balance sheets, with changes in fair value recorded through earnings.
We evaluate our loans on a quarterly basis and fair value is determined by our Board through its independent Audit and Valuation Committee. We use an independent third-party valuation firm to provide input in the valuation of all of our unquoted investments, which we consider along with other various subjective and objective factors in making our evaluations.
Our loans are typically valued using a yield analysis, which is typically performed for non-credit impaired loans to borrowers. To determine fair value using a yield analysis, a current price is imputed for the loan based upon an assessment of the expected market yield for a similarly structured loan with a similar level of risk. In the yield analysis, we consider the current contractual interest rate, the maturity and other terms of the loan relative to risk of the borrower and the specific loan. A key determinant of risk, among other things, is the leverage through the loan relative to the enterprise value of the borrower. As loans held by us are substantially illiquid with no active transaction market, we depend on primary market data, including newly funded loans, as well as secondary market data with respect to high-yield debt instruments and syndicated loans, as inputs in determining the appropriate market yield, as applicable. Changes in market yields may change the fair value of certain of our loans. Generally, an increase in market yields may result in a decrease in the fair value of certain of our loans, however this is mitigated to the extent our loans bear interest at a floating rate.
Due to the inherent uncertainty of determining the fair value of loans that do not have a readily available market value, the fair value of our loans may fluctuate from period to period. Additionally, the fair value of our loans may differ significantly from the values that would have been used had a ready market existed for such loans and may differ materially from the values that we may ultimately realize. Further, such loans are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate our investment in a loan in a forced or liquidation sale, we could realize significantly less than the value at which we had recorded such loan investment.
Changes in Market Interest Rates and Effect on Net Interest Income
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and our related financing obligations.
Our operating results depend in large part on differences between the income earned on our assets and our cost of borrowing. The cost of our borrowings generally will be based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase (a) while the yields earned on our leveraged fixed-rate loan assets will remain static, and (b) at a faster pace than the yields earned on our leveraged floating-rate loan assets, which could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our target investments. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.
Interest Rate Cap Risk
WeThrough our Manager, we originate both fixed and may infloating rate loans and going forward, we intend to have the future acquire floating-rate assets.majority of our loans by aggregate commitments accrue at floating rates. These are assets in which the loans may be subject to periodic and lifetime interest rate caps and floors, which limit the amount by which the asset’s interest yield may change during any given period. However, our borrowing costs pursuant to our financing agreements may not be subject to similar restrictions. Therefore, in a period of increasing interest rates, interest rate costs on our borrowings could increase without limitation by caps, while the interest-rate yields on our floating-rate assets would effectively be limited. In addition, floating-rate assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our receipt of cash income from such assets in an amount that is less than the amount that we would need to pay the interest cost on our related borrowings. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations.
In July 2017, the Financial Conduct Authority announced its intention to phase out LIBOR by the end of 2021 and the IBA recently announced that it will be consulting on plans to extend the cessation date for certain tenors of U.S.-dollar LIBOR until 2023. It is not possible to predict the effect of any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR’s phase out. If LIBOR is no longer available, our applicable loan documents generally allow us to choose a new index based upon comparable information Any of these proposals or consequences could have a material adverse effect on our interest expenses.
Interest Rate Mismatch Risk
We may fund a portion of our origination of loans, or of loans that we may in the future acquire, with borrowings that are based on LIBOR, while the interest rates on these assets may be fixed or indexed to LIBOR or another index rate. Accordingly, any increase in LIBOR will generally result in an increase in our borrowing costs that would not be matched by fixed-rate interest earnings and may not be matched by a corresponding increase in floating-rate interest earnings. Any such interest rate mismatch could adversely affect our profitability, which may negatively impact distributions to our stockholders.
Our analysis of risks is based on our Manager’s experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of decisions by our Manager and our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results.
Market Conditions
We believe that favorable market conditions, including an imbalance in supply and demand of credit to cannabis operating companies, have provided attractive opportunities for non-bank lenders, such as us, to finance commercial real estate loans and other loans that exhibit strong fundamentals but also require more customized financing structures and loan products than regulated financial institutions can presently provide. Additionally, to the extent that additional states legalize cannabis, our addressable market will increase. WeWhile we intend to continue our track record of capitalizing on these opportunities and growing the size of our portfolio.portfolio, we are aware that the competition for the capital we provide is increasing.
Credit Risk
We are subject to varying degrees of credit risk in connection with our loans and interest receivable. Our Manager seeks to mitigate this risk by seeking to originate loans, and may in the future acquire loans, of higher quality at appropriate prices given anticipated and unanticipated losses, by employing a comprehensive review and selection process and by proactively monitoring originated and acquired loans. Nevertheless, unanticipated credit losses could occur that could adversely impact our operating results.
We expect to be subject to varying degrees of credit risk in connection with holding our portfolio of loans. We will have exposure to credit risk on our commercial real estate loans and other targeted types of loans. Our Manager will seek to manage credit risk by performing deep credit fundamental analysis of potential assets and through the use of non-recourse financing, when and where available and appropriate.
Credit risk will also be addressed through our Manager’s on-going review, and loans will be monitored for variance from expected prepayments, defaults, severities, losses and cash flow on a quarterly basis.
Other than the acquisition of our initial portfolio of loans and certain loan commitments relating to Private Company A, we, through our Manager, have originated substantially all of our loans and intend to continue to originate our loans, but we have previously and may in the future acquire loans from time to time. Our Investment Guidelines are not subject to any limits or proportions with respect to the mix of target investments that we make or that we may in the future acquire other than as necessary to maintain our exemption from registration under the Investment Company Act and our qualification as a REIT. Our investment decisions will depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments. As a result, we cannot predict the percentage of our capital that will be invested in any individual target investment at any given time.
Our loan portfolio as of March 31, 2022 was concentrated with the top four borrowers representing approximately 69.4% of the aggregate outstanding principal balances and approximately 69.0% of the total loan commitments. Additionally, the industry is experiencing significant consolidation, which we expect to continue, 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 20.6% of our total loan commitments and approximately 23.2% of the aggregate outstanding principal balances of our portfolio as of March 31, 2022 and the borrower under this credit facility is Public Company F, 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. Our portion of the senior term loan provided to such borrower had an aggregate principal amount of $86.6 million outstanding as of March 31, 2022. This senior term loan accrues interest at a blended rate of 8.6% per annum, payable in cash, across the three tranches of the senior term loan facility. The Public Company F senior term loan is managed by a third-party agent, acting as sole lead arranger, administrative agent and collateral agent, which is an affiliate of one of the other lender parties.
In June 2016, the FASB issued ASUAccounting Standards Update (“ASU”) No. 2016-13, which replaced the incurred loss impairment methodology pursuant to GAAP with a methodology that reflects current expected credit losses (“CECL”) on both the outstanding balances and unfunded commitments on loans held for investment and requires consideration of a broader range of historical experience adjusted for current conditions and reasonable and supportable forecast information to inform credit loss estimates (the “CECL Reserve”). We adopted ASU No. 2016-13 as of July 31, 2020, the date of our commencement of operations. Subsequent period increases and decreases to expected credit losses impact earnings and are recorded within provision for current expected credit losses in our consolidated statement of operations. The CECL Reserve related to outstanding balances on loans held for investment required under ASU No. 2016-13 is a valuation account that is deducted from the amortized cost basis of our loans held at carrying value and loans receivable at carrying value in our consolidated balance sheet. The CECL Reserve related to unfunded commitments on loans held at carrying value is recorded within accounts payable and other liabilities in our consolidated balance sheet. Refer to footnoteNote 6 to our unaudited interim consolidated financial statements titled “Current“Current Expected Credit Losses” for more information on CECL.
We provide loans to established companies operating in the cannabis industry which involves significant risks, including the risk of strict enforcement against our borrowers of the federal illegality of cannabis, our borrowers’ inability to renew or otherwise maintain their licenses or other requisite authorizations for their cannabis operations, and such loans lack of liquidity, and we could lose all or part of any of our loans.
Our ability to grow or maintain our business depends on state laws pertaining to the cannabis industry. New laws that are adverse to our borrowers may be enacted, and current favorable state or national laws or enforcement guidelines relating to cultivation, production and distribution of cannabis may be modified or eliminated in the future, which would impede our ability to grow and could materially adversely affect our business.
Management’s plan to mitigate risks include monitoring the legal landscape as deemed appropriate. Also, should a loan default or otherwise be seized, we may be prohibited from owning cannabis assets and thus could not take possession of collateral, in which case we would look to sell the loan, which could result in us realizing a loss on the transaction.
Real Estate Risk
Commercial real estate loans are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loan or loans, as the case may be, which could also cause us to suffer losses.
Risk Management
To the extent consistent with maintaining our REIT qualification and our exemption from registration under the Investment Company Act, we seek to manage risk exposure by closely monitoring our portfolio and actively managing the financing, interest rate, credit, prepayment and convexity (a measure of the sensitivity of the duration of a loan to changes in interest rates) risks associated with holding our portfolio of loans.portfolio. Generally, with the guidance and experience of our Manager:
we manage our portfolio through an interactive process with our Manager and service our self-originated loans through our Manager’s servicer;
we invest in a mix of floating-ratefloating- and fixed-rate loans to mitigate the interest rate risk associated with the financing of our portfolio;
we actively employ portfolio-wide and asset-specific risk measurement and management processes in our daily operations, including utilizing our Manager’s risk management tools such as software and services licensed or purchased from third-parties and proprietary analytical methods developed by our Manager; and
we seek to manage credit risk through our due diligence process prior to origination or acquisition and through the use of non-recourse financing, when and where available and appropriate. In addition, with respect to any particular target investment, prior to origination or acquisition our Manager’s investment team evaluates, among other things, relative valuation, comparable company analysis, supply and demand trends, shape-of-yield curves, delinquency and default rates, recovery of various sectors and vintage of collateral.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintainThe Company maintains disclosure controls and procedures (as that term is defined in RuleRules 13a-15(e) ofand 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by us in the Company’s reports that we file or submit under the Exchange Act is recorded, processed, and summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to ourthe Company’s management, including our chief executive officerits Chief Executive Officer and chief financial officer,Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report we carried out an evaluationon Form 10-Q was made under the supervision and with the participation of our management, including our chief executive officerChief Executive Officer and chief financial officer, of the effectiveness of our disclosure controls and procedures.Chief Financial Officer. Based upon this evaluation, our chief executive officerChief Executive Officer and chief financial officerChief Financial Officer have concluded that our disclosure controls and procedures were(a) are effective at a reasonable assurance levelto ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as of March 31, 2021.appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Overover Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) during the quarter ended March 31, 20212022 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
InFrom time to time, we may become involved in litigation or other legal proceedings relating to claims arising from the normalordinary course of business, webusiness. Furthermore, third parties may be subjecttry to various legal proceedings from timeseek to time.impose liability on us in connection with our loans. As of March 31, 2021,2022, we were not subject to any material pending legal proceedings.
For a discussion of our potential risks and uncertainties, seeDuring the information under the heading "Risk Factors" in our Final Prospectus, included in the Company's Registration Statement on Form S-11, as amended (SEC File No. 333-251762). There have beenquarter ended March 31, 2022, there were no material changes to the risk factorsRisk Factors disclosed in Item 1A - “Risk Factors” in the Final Prospectus.Company’s Annual Report on Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Unregistered Sales of Equity Securities
There were no unregistered sales of equity securities during the three months ended March 31, 2021.2022.
Use of Proceeds
On March 18, 2021, the SEC declared effective our registration statement on Form S-11 (Registration No. 333-251762) (the “Registration Statement”) with respect to our IPO. On March 23, 2021,January 10, 2022, we completed our IPOan underwritten offering of 6,250,0003,000,000 shares of our common stock, at a price of $19.00$20.50 per share, raising $118.8share. Our gross proceeds from the offering were $61.5 million, in gross proceeds. JMP Securities, Ladenburg Thalmannbefore deducting underwriting discounts and Seaport Global Securities served as joint book-running managerscommissions, a structuring fee and Lake Street served as co-manager. Theoffering expenses. In connection with the offering, the underwriters also exercised theirwere granted an over-allotment option to purchase up to an additional 937,500450,000 shares of our common stock. On January 14, 2022, the underwriters partially exercised the over-allotment option with respect to 291,832 shares of common stock, at a price of $19.00 per share, which was completed on March 26, 2021, raising $17.8 million in additional gross proceeds. The offering commenced on MarchJanuary 19, 2021 and did not terminate before all of the securities registered in the Registration Statement were sold.
We received net proceeds of approximately $123.9 million from our IPO, including through the exercise of the over-allotment by the underwriters.2022. The underwriting commissions of approximately $3.5 million were $8.3 million and $1.2 million, fromreflected as a reduction of additional paid-in capital in the closingfirst quarter of the IPO and the over-allotment, respectively.fiscal year 2022. We incurred approximately $3.1$1.0 million of expenses in connection with the IPO. Alloffering. After giving effect to the partial exercise of the over-allotment option, the total number of shares sold in the public offering was 3,291,832 shares and total gross proceeds, before deducting underwriting discounts and commissions, a structuring fee and other offering expenses, were direct or indirect payments to persons other than: (i) our directors, officers or any of their associates; (ii) persons owning ten percent (10%) or more of our common stock; or (iii) our affiliates.approximately $67.5 million.
As of the date of the quarterly report we have used $52.1 million of the net proceeds to fund loans related to new commitments since the IPO and $3.9 million of the net proceeds to fund previously unfunded commitments. We intend to use the balance of the net proceeds (i) to fund loans related to unfunded commitments to existing borrowers, (ii) to originate and participate in commercial loans to companies operating in the cannabis industry that are consistent with our investment strategy and (iii) for working capital and other general corporate purposes. Until appropriate investments can be identified, we may invest this balance in interest-bearing, short-term investments, including money market accounts or funds, commercial mortgage-backed securities and corporate bonds, which are consistent with the Company’s intention to qualify as a REIT and to maintain our exclusion from registration under the Investment Company Act. None of the proceeds were used to make payments to: (i) our directors, officers or any of their associates; (ii) persons owning ten percent (10%) or more of our common stock; or (iii) our affiliates. There has been no material change in the use of proceeds as described in the Final Prospectus.
Repurchases of Common Stock
There were no issuer repurchases of common stock during the quarter ended March 31, 2021.
2022.Item 3. | Defaults Upon Senior Securities |
Item 4. | Mine Safety Disclosures |
None.
On May 7, 2021, we amended our Revolving Credit Agreement to increase the loan commitment from $40 million to $50 million, decrease the interest rate from 8% per annum to 6% per annum, remove Gamma Lending Holdco as a lender and extend the maturity date from July 31, 2021 to the earlier of (i) December 31, 2021 or (ii) the date of the closing of any credit facility where the proceeds are incurred to refund, refinance or replace the Revolving Credit Agreement with an aggregate principal amount equal to or greater than $50.0 million in accordance with the terms in the Revolving Credit Agreement. We did not incur any fees or cost related to the amendment of the Revolving Credit Agreement and the Revolving Credit Agreement does not have any unused fees. As of the date of this quarterly report, we have not drawn on the Revolving Credit Agreement or incurred any fees or interest expense related to the Revolving Credit Agreement.
Exhibit No. | | Document |
| | Articles of Amendment and Restatement of AFC Gamma, Inc. (incorporated by reference to(filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-11 as amended (File No. 333-251762))on January 22, 2021 and incorporated herein by reference). |
| | Articles of Amendment, dated March 10, 2022 (filed as Exhibit 3.1A to the Company’s Annual Report on Form 10-K on March 10, 2022 and incorporated herein by reference). |
| | Amended and Restated Bylaws of AFC Gamma, Inc. (incorporated by reference to(filed as Exhibit 3.4 to the Company’s Registration Statement on Form S-11 as amended (File No. 333-251762))on January 22, 2021 and incorporated herein by reference). |
| | First Amendment to Amended and Restated Management Agreement, dated January 14, 2021,March 10, 2022 by and between AFC Gamma, Inc. and AFC Management, LLC (incorporated(filed as Exhibit 10.1A to the Company’s Annual Report on Form 10-K on March 10, 2022 and incorporated herein by reference toreference). |
| | Loan and Security Agreement, dated April 29, 2022, by and among AFC Gamma, Inc., as Borrower, and the lenders that are party thereto (filed as Exhibit 10.110.7 to the Company’s Current Report on Form 8-K filed on March 23, 2021)May 2, 2022 and incorporated herein by reference). |
| Amendment dated May 7, 2021, to the Secured Revolving Credit
| Open Market Sale Agreement, dated August 18, 2020,April 5, 2022, by and among AFC Gamma, Inc., as borrower, AFC Finance,Management, LLC, as agent, and AFC Finance,Jefferies LLC and Gamma Lending HoldcoJMP Securities LLC (filed as lenders.Exhibit 1.2 to the Company’s Registration Statement on Form S-3 on April 5, 2022 and incorporated herein by reference). |
| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | | Inline XBRL Instance Document.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
101.DEF 104 | | Cover Page Interactive Data File (formatted as Inline XBRL Taxonomy Extension Definition Linkbase Document.and contained in Exhibit 101). |
* Filed herewith
36** Furnished herewith
† The registrant has omitted portions of the referenced exhibit pursuant to Item 601(b) of Regulation S-K because such portions are both (i) not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 11, 2021 | | 10, 2022 | |
| AFC GAMMA, INC. |
| | |
| By: | | /s/ Leonard MM. Tannenbaum |
| | Leonard M. Tannenbaum |
| Leonard M Tannenbaum
| Chief Executive Officer, Chairman and Director |
| | (Principal Executive Officer) |
| By: | | /s/ Thomas GeoffroyBrett Kaufman |
| | Brett Kaufman |
| Thomas Geoffroy
| Chief Financial Officer and Treasurer |
| | (Principal Financial Officer and Principal Accounting Officer) |
37