Welcome to the Cannabis Investing Newsletter Forum. Feel free to find your favorite cannabis stocks and contribute content as you please; content that continues the discussion of and analysis of cannabis stocks. – D. H. Taylor
AFC GAMMA INC. (AFCG)
Could this be a good pick for your older subscribers close to retirement?
AFC Gamma Inc. (AFCG) – or Advanced Flower Capital Gamma – went public in March and became only the second pure-play cannabis real estate investment trust (REIT) to list on a major exchange. It operates by providing cannabis operators access to loans and cash-flow-generating real estate assets.
As a REIT, AFC Gamma originates and structures its loans, screens deals, continuously reviews company performance, and ensures the loan covenants are met. The company targets lending with rates between 12% and 20%. It’s made deals with some of the biggest multistate operators (MSOs) in the country – including Curaleaf Holdings Inc. (CURLF), TerrAscend Corp. (TRSSF), and Verano Holdings Corp. (VRNOF), to name a few.
And because REITs don’t pay the usual taxes, AFC Gamma is required to pay 90% of its taxable income to shareholders in the form of dividends which, as of this writing, are at $1.72 – a yield of 7.59%.
Why to Like Them
Since AFC Gamma doesn’t grow, transport, sell, or touch the cannabis plant, it keeps its hands completely clean in the eyes of the federal government. And it’s in the perfect position to cash in on the cannabis boom. Because as companies expand to meet the increasingly massive demand for cannabis in the United States, they’ll need spaces to rent, and AFC is one of the only cannabis REITs in the game.
We saw how much money cannabis REITs can make investors with Innovative Industrial Properties (IIPR). On December 1, 2016, IIPR’s stock was trading for just $20.25. It has since gained over 1,000% and now trades around $230.
Today, AFC Gamma is looking a lot like IIPR did in those early days and is trading right around $21. It’s young and, therefore, not as well-known as IIPR yet – and that’s good for you. Because it means you have an opportunity to cash in on what could be the next IIPR while all its upside is still in front of it… all while earning a dividend.
The Summary of Key Company Findings Regarding AFC Gamma Inc.
AFC Gamma Inc. (AFCG) is one of only two pure-play cannabis real estate investment trusts (REITs) to be listed on a major exchange – the Nasdaq. A big board listing provides companies with increased visibility and liquidity. This means shares are easier to trade, less susceptible to volatility, and available to a wider base of investors.
As per its operations, AFC Gamma loans money at high interest rates – anywhere between 12% to 20%. To date, the company has funded 15 deals with capital committed to another three deals totaling nearly $200 million in lent funds. The high rates combined with a healthy amount of lent funds leads to a flow of interest payments.
AFC Gamma’s deal strength comes from a rigorous approach to due diligence thanks to a management team with extensive experience in credit analysis. It conducts due diligence with thorough research on company brands, operations, the legislative landscape of the companies’ markets, and specific projects where loaned funds will be utilized. Furthermore, it structures its loans with backing from real estate assets and strict covenants.
As a REIT, AFC Gamma is entitled to certain privileges. For one, it does not pay income tax – which is good for the company’s bottom line as it is one less cash outflow. In exchange for these privileges, it must distribute a substantial portion of its income as dividends, which is a huge upside for investors. And as AFC Gamma’s operations expand and bring in more money, higher dividends will be paid out to investors.
Despite rigorous due diligence practices, AFC Gamma is still exposed to credit risks. A slowdown in the industry can lead to missed interest payments or defaults on loans. High interest rates and strict covenants are designed to protect AFC Gamma’s loaned capital – they serve as mitigation to these issues. However, any amount of missed payments or defaults can damage AFC Gamma’s returns.
Beyond its outstanding loans, AFC Gamma is constantly sourcing and researching new deals. This has led to an actionable pipeline of possible lending valued at $855 million as of this writing. This pipeline can increase further as AFC Gamma conducts additional research and as new companies enter the cannabis industry.
Further, the company has a strong cash position of $124 million. It also has a healthy stream of additional cash coming in from interest and principal repayments on its loans. With more cash, AFC Gamma can originate more loans and make the most of its lending pipeline.
As the industry grows, AFC Gamma stands to grow with it. As more companies seek to expand, they may seek debt capital from sources like AFC Gamma. This can increase AFC Gamma’s actionable pipeline and outstanding loans – which can lead to more interest income and dividends paid out to investors.
Paradoxically, federal legislation – like new banking regulations or full legalization – may hurt AFC Gamma to some degree. If traditional lenders begin lending to cannabis companies, the increase in loan supply can send yields on new loans down. Also, full legalization may decrease the risks to lending to cannabis firms – which will also decrease yields on cannabis loans. Decreased yields on loans means lenders like AFC Gamma will receive less in interest payments, decreasing the overall profitability of lending.
Company Risk Score: 82.00
We assign each company a “Risk Score,” which weighs the strengths, weaknesses, opportunities, and threats of the company – with the best possible score being 100.