This Cannabis Lender Is Sitting On A Stack Of Capital: 100% Dividends Meet Equity-Like Returns
In a recent webinar hosted by Pablo Zuanic from Zuanic & Associates, AFC Gamma's top executives discussed the company's strategic direction, focusing on the spin-off of its commercial real estate business, the current state of its cannabis loan book, and its competitive positioning in the industry.
Spin-Off Rationale And Structure
Dan Neville, CEO of AFC Gamma, Inc. (NASDAQ:AFCG), detailed the strategic decision to spin off the company's commercial real estate business into a separate entity, Sunrise Realty Trust (NASDAQ:SONS).
Neville explained, "We identified a void in the industry for traditional institutional lending to the cannabis sector. However, investors wanted pure-play exposure."
The spin-off was structured as a dividend, resulting in the creation of Sunrise Realty Trust with an initial portfolio of $50 million in deals and $65 million in cash.
Dividends And Tax Advantage
This separation allows each entity to focus on its core competencies and target investor bases more effectively. Neville highlighted that AFC Gamma, as a real estate investment trust (REIT), continues to pay out 90-100% of its earnings as dividends, maintaining a tax advantage for its investors.
The newly formed Sunrise Realty Trust is now independently managed. Neville noted that while AFC Gamma will concentrate solely on cannabis lending, Sunrise Realty Trust will leverage its cash position and new vintage portfolio to explore growth opportunities in the commercial real estate market.
Post-Spin-Off Valuation
Post-spin-off, AFC Gamma has sharpened its focus as a dedicated cannabis lender. Neville emphasized the company's commitment to its core business, highlighting a streamlined structure poised for improved financial performance. "We now have around $300 million in our cannabis loan book.”
Robyn Tannenbaum, president of AFC Gamma, highlighted significant progress in exiting underperforming loans and redeploying capital into more promising opportunities. "We've already closed two deals worth $42 million this year, with more in the pipeline aiming for $100 million in new capital deployment," she said.
Neville also addressed the company's proactive approach to portfolio management, emphasizing the importance of stringent underwriting standards and hands-on oversight.
This meticulous approach not only mitigates risks but also positions AFC Gamma to achieve mid-to-high teen returns, even in a challenging market environment.
The spin-off is expected to drive sustainable growth and enhanced value for shareholders.
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At The Top Of The Capital Stack
Neville and Tannenbaum addressed AFC Gamma's performance relative to its peers. Neville emphasized, "We sit at the top of the capital stack in a growth industry, earning equity-like returns." This position is attributed to AFC Gamma's rigorous underwriting standards and proactive portfolio management, which set it apart in the competitive landscape.
Neville elaborated on the stringent criteria AFC Gamma employs when evaluating potential deals, focusing on robust cash flows, solid licenses, and valuable real estate.
These factors contribute to a meticulous underwriting process that prioritizes high-quality, low-risk loans.
He also noted that the company's status as a REIT mandates a disciplined approach to capital allocation and risk management, further enhancing investor confidence.
Tannenbaum added, "We've visited every single one of our borrowers, some multiple times, to ensure the integrity of our underwrites and the success of our partners."
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These issues will be among the hot topics at the upcoming Benzinga Cannabis Capital Conference in Chicago this Oct. 8-9. Join us to get more insight into what the wave of weed legalization means for the future of investing in the industry. Hear directly from top executives, investors, advocates, and policymakers. Get your tickets now before prices go up by following this link.
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