AFC Gamma (NASDAQ:AFCG) reported second-quarter net investment income of $3.5 million, or $0.15 per weighted average common share, while emphasizing opportunities to deploy capital in the lower middle-market private credit sector as lenders retreat amid broader market stress.
The company’s board declared a quarterly distribution of $0.05 per share, paid July 15 to shareholders of record June 30. The distribution was covered three times by quarterly net investment income, according to Chief Financial Officer Brandon Hetzel.
Lower Middle-Market Lending Focus
Tannenbaum said AFC views the environment as a potentially attractive origination vintage, particularly for lenders that can source transactions, maintain sponsor relationships and negotiate protective loan terms. The company generally targets investments supported by enterprise value and asset coverage, with maintenance covenants including leverage and fixed-charge coverage tests, she said.
Chief Executive Officer Dan Neville said AFC’s pipeline stood at $1.3 billion across a range of industries. The company is focused on cash-flowing borrowers with EBITDA of $5 million to $15 million, primarily in sponsor-backed transactions.
“Originations are going to be lumpy,” Neville said in response to an analyst question, noting the company made roughly $80 million of originations in the first quarter and less in the second quarter. He said AFC was advancing several opportunities and was satisfied with the quality and pricing of transactions in its pipeline.
Portfolio Growth and Investment Activity
As of June 30, AFC’s investment portfolio had a fair value of $290 million across 17 portfolio companies, compared with $279 million across 15 companies at March 31. The portfolio was entirely invested in senior secured first-lien debt, and its weighted average yield, excluding non-accrual loans, was 13.2%.
During the quarter, AFC funded $17 million, consisting of $5 million to two new portfolio companies and $12 million to two existing companies. The company recorded $8 million in fundings against $9 million of amortization and repayments.
After the quarter ended, AFC committed $7 million to a $25 million senior secured credit facility for an outpatient behavioral health platform, funding $3.1 million at closing. Neville said the platform operates 10 locations in the Northeast and provides services including talk therapy, medication management and partial hospitalization programs. The proceeds are intended to refinance debt and support acquisitions.
Hetzel said the company had more than $70 million of available liquidity to deploy at quarter-end. Neville added that AFC can participate alongside affiliates under its SEC co-investment relief order and may syndicate loans that exceed its target hold threshold.
Legacy Cannabis Loan Resolutions
Non-accrual loans remain concentrated in AFC’s legacy cannabis portfolio. Neville said the receiver overseeing DEBI’s liquidation entered into a binding term sheet during the quarter to sell two additional DEBI assets for $12.5 million in cash proceeds. DEBI received a $2 million non-refundable deposit after quarter-end, and AFC expects the transaction to close this year.
AFC has received $58 million of principal repayments on the DEBI loan since inception. Neville said AFC is the lead participant in the loan and holds roughly 78% to 80% of the position, meaning proceeds would be distributed on a pro rata basis.
For DMA, the receiver sold two of three dispensaries after regulatory approvals were received in June and the transactions closed in July. One asset remains to be resolved, Neville said.
The Justice Grown loan matured May 1 and is in maturity default. AFC has commenced Article 9 foreclosure actions and is pursuing remedies under the credit agreement, including parent and shareholder guarantees. The collateral includes vertically integrated assets in New Jersey, three operating dispensaries in Pennsylvania and a non-operating Pennsylvania cultivation facility. AFC retained SSC Advisors to market the assets.
Neville also said a Sunburn loan returned to good standing after the borrower met conditions under a forbearance agreement, including raising additional equity capital. AFC received a paydown on that loan during the second quarter.
Despite regulatory developments in cannabis, Neville said AFC remains cautious about new lending in the sector because of limited access to equity capital. He said the lack of equity financing can make it more difficult for borrowers to address operational, regulatory or market volatility.
Financial Position and Share Repurchases
Total investment income was $8.7 million in the second quarter, down from $9.8 million in the first quarter. Hetzel said the decline primarily reflected $1.8 million of other income recognized in the first quarter that did not recur, including a $1.5 million exit fee associated with the Bloom repayment. Excluding episodic exit fees, investment income rose modestly on higher interest income.
At June 30, AFC had $364.5 million of principal outstanding across 17 loans, total assets of $399.7 million and net assets of $187.3 million. Net asset value per share increased $0.35 sequentially to $8.25.
The increase reflected $0.15 per share of net investment income, $0.17 per share of accretion from repurchasing stock below net asset value and approximately $0.08 per share of unrealized appreciation, partly offset by the $0.05 per-share distribution.
During the quarter, AFC repurchased and retired approximately 839,000 shares at an average price of $3.29 per share, for about $2.8 million. About $2.2 million remained under the company’s $5 million repurchase authorization.
AFC ended the quarter with $207 million of debt outstanding and $106.5 million of cash and cash equivalents. After quarter-end, the company repaid $84 million on its secured revolving credit facility and $20 million on its unsecured revolving credit facility. Net debt-to-equity was 0.53 times at June 30, while the asset coverage ratio was 190%, above the 150% requirement applicable to the company.
About AFC Gamma (NASDAQ:AFCG)
AFC Gamma, Inc is a specialty finance real estate investment trust that focuses on providing structured financing solutions to companies operating and developing digital infrastructure and life science real estate assets. As a REIT, AFC Gamma seeks to generate attractive risk-adjusted returns through a diversified portfolio of loans, preferred equity and other financing structures that are secured by tangible property collateral or contractual revenue streams.
The company’s primary business activities include originating, acquiring and managing secured loans and equity investments that support wireless and broadband network deployment, data center expansion, and life sciences facility development.
