Advanced Flower Capital Inc. (AFCG) Earnings Call Transcript & Summary

Good day and welcome to the AFC Gamma's conference call to discuss its plan to separate AFC Gamma's commercial real estate lending business Sunrise Realty Trust. [Operator Instructions] As a reminder: This call is being recorded. And now I'd like to turn the call over to Gabriel Katz, Chief Legal Officer. You may begin.

Good afternoon and thank you all for joining on such short notice. I'm joined today by Daniel Neville, our Chief Executive Officer; Leonard Tannenbaum, our Executive Chairman; Brian Sedrish, prospective Chief Executive Officer of Sunrise Realty Trust; Brandon Hetzel, our Chief Financial Officer; and Robyn Tannenbaum, our President. Before we begin, I would like to note that this call is being recorded. Replay information is included in our February 22, 2024, press release and is posted on the investor relations section of AFC Gamma's website at afcgamma.com, along with today's press release and an investor presentation. Today's conference call includes forward-looking statements and projections that reflect the company's current views with respect to, among other things, anticipated market developments and financial performance in 2024 and beyond. These statements are subject to inherent uncertainties in predicting future results and conditions. Please refer to Sunrise Realty Trust's Form 10 filing with the SEC for certain significant factors that could cause actual results to differ materially from these forward-looking statements and projections. The format for today's call is as follows. Len and Dan will provide introductory remarks and provide an overview of the strategic rationale for the separation. And Brian will provide an outline of Sunrise Realty Trust's market opportunity. We will then open the call to Q&A. Before I turn it over to Len, please note everything we discuss today is dependent on SEC review, so timing will remain fluid. We anticipate the separation will be deemed effective in the middle of this year. With that, I will now turn the call over to our Executive Chairman, Leonard Tannenbaum.

Thanks, Gabe. We are excited to be here today to discuss the spin-off of Sunrise Realty Trust from AFC Gamma. Today's announcement follows significant evaluation and thought from the AFC Board and the management team, and we are pleased to deliver this outcome for our shareholders. With that, our Board of Directors has unanimously approved a plan to spin off our commercial real estate portfolio into an independent publicly traded REIT called Sunrise Realty Trust. Upon completion of the separation, the entity is expected to trade on the NASDAQ Exchange under the ticker S-U-N-S. Since we expanded our investment mandate to include CRE, we've heard from our shareholders and analysts about the desire [ for ] pure-play alternatives. This spin-off does just that. And we will create 2 pure-play capital providers, 1 focused solely on the cannabis industry; and the second, on commercial real estate in the Southern United States. We believe that the separation will allow both companies to focus on their respective portfolios, articulate their own clear investment thesis and have the flexibility to tailor their business strategies to best capture market opportunities within their specialization. After much review and evaluation of the strategic options, the Board concluded that creating these 2 distinct pure-play lenders represented the best path forward to maximize the value for our shareholders. Since inception, AFC has solidified its position as a leading institutional lender to state-licensed cannabis operators. With this separation, AFC can focus solely on the cannabis industry originating and funding loans to establish cannabis operators in states with attractive licensing and favorable supply and demand environments. Through their stock in SUNS, AFC shareholders will continue to benefit from a CRE portfolio that [ is a ] new vintage and is focused on the high-growth area of the Southern United States. Each business has different markets, drivers and value creation strategies, with 2 distinct investment identities. On Slide 4, you can see a snapshot of both AFC and Sunrise Realty Trust. Based on our September 30, 2023, balance sheet, if the 2 businesses were separated today, AFC would have approximately $330 million of assets across 12 funded cannabis loans. Sunrise Realty Trust would have approximately $115 million of assets comprised of cash and loans. We currently have signed term sheets and are documenting deals in both cannabis and CRE which may close prior to the spin. On Slide 5, you can see an overview of both entities' portfolios. And now Dan is going to take you through the details of that separation structure.

Thanks, Len. It's great to kick off my first call with such an important milestone for AFC. Turning to Slide 6, we cover the structure of this separation. Upon separation, AFC shareholders will retain their current shares and also receive a pro rata dividend of shares in new SUNS stock. As outlined in our press release this afternoon, the separation of the CRE portfolio and the resulting spin-off will be completed in 2 steps. First, AFC will contribute and SUNS will assume the assets and liabilities related to AFC's commercial real estate lending business as currently conducted by SUNS. Second, AFC will make a pro rata distribution of SUNS common stock to AFC shareholders. AFC shareholders will receive a proportional ownership in SUNS immediately post separation. To be crystal clear: If a shareholder owns 1% of AFC as of the record date, they would receive 1% ownership of SUNS upon the spin-off. Additionally, we anticipate that AFC shareholders as of the record date of the SUNS distribution will receive a special cash dividend of $0.15 per share of AFC common stock. The path to separation itemizes the milestones we have achieved already to date and the remaining steps in the process. As Gabe said at the outset, we expect to complete the spin-off by mid-2024, subject to SEC review and our Form 10 being declared effective as well as final approval by our Board of Directors. You're all familiar with AFC, but I'd like to spend a few minutes highlighting some of our key differentiators now that we will return to a pure-play cannabis lender. Today, we are one of the leading debt providers of institutional loans to the cannabis industry, which is rapidly expanding $30 billion market with a limited supply of institutional [ capital ]. The cannabis industry is capital intensive and has experienced a capital drought over the last 18 months. Given this limited supply of institutional capital, we believe this will allow us to move up the quality curve while still achieving mid- to high-teens IRRs. AFC has maintained a low-leverage balance sheet and a current dividend yield of approximately 16%. The weighted average portfolio yield to maturity, which is measured for each loan over the life of [ such loan ], was approximately 21% as of February 1, 2024. We deploy a rigorous, repeatable and dependable investment process that is both a top-down as well as a bottoms-up approach, evaluating opportunities with both a lender's and an operator side. This, combined with the industry relationships that Len, Robyn and myself have built over the last 5 years, should enable us to effectively source, screen and deploy capital at attractive risk-adjusted returns. Our active pipeline of cannabis deals is $279 million and continues to grow, and I'm particularly pleased with the quality of the operators and the deals that we have in the pipeline. As we think about the go-forward AFC, we want to be clear. This spin-off allows AFC to return to its exclusive focus on cannabis industry investments. We expect this focus will attract an investor base ideally suited for the growth opportunities of the cannabis lending industry. This outcome was driven by the Board and management team's work but also directly informed by the views of our shareholders. As our commercial real estate business grew, it became clear that certain AFC shareholders invested in the company for our original value proposition and market opportunity in the cannabis space. We have an experienced, cycle-tested leadership team with over 50 years of combined lending and investment management experience. This team, which brings both operating and credit expertise, will continue uninterrupted upon completion of the separation. AFC remains uniquely positioned to capitalize on the opportunity to provide capital to existing borrowers and new well-capitalized operators that are looking to build and/or expand by buying distressed assets at a significant discount. Slide 11 details the diversified portfolio of AFC. Our cannabis loan portfolio includes 12 loans to borrowers who now operate across 16 states. Cannabis industry continues to have a limited supply of institutional capital despite its continued rapid expansion. As the march toward legalization continues, demand for capital will only increase. Between Ohio, Pennsylvania, Florida and Virginia, an additional 58 million Americans could gain access to adult-use cannabis in the next few years. Additionally, states like North Carolina, South Carolina and Kentucky are likely or already have implemented medical programs. This is all incremental demand that will require significant additional capital to increase [ grow ] capacity, production and distribution infrastructure and points of retail distribution. In conclusion. We are confident that AFC is positioned to take advantage of our market opportunity in cannabis. We were an early mover in the space and have managed to stay ahead of the curve, thanks to the expertise of our team. As we discussed last quarter, we are increasingly seeing Cannabis 3.0 operators emerge that have clean capital stacks and are looking to go on the offensive as legacy operators struggle due to excessive leverage and the current capital drought. This is a significant, new opportunity as these operators buy distressed assets and new investors continue to enter the market to purchase assets at a significant discount. We firmly believe that AFC is uniquely positioned to be a go-to provider of capital to these operators. I'll now hand the call over to Brian Sedrish, the SUNS prospective CEO. Brian?

Thank you, Dan. And a pleasure to speak with all of you today. Before we dive into the opportunities we see at Sunrise Realty, I wanted to provide a little bit of background on myself and our team. I bring over 20 years of leadership experience within real estate private equity and credit, having focused on institutional commercial real estate opportunities across a number of institutional real estate firms, most recently at Related Fund Management where I was a portfolio manager for their credit business and, prior to that, as head of commercial real estate acquisitions within Deutsche Bank's special situations real estate group; and before that, holding roles at such firms is Fortress, Goldman Sachs and Lazard Frères. The investment team we have lined up for SUNS includes 6 investment professionals, all with significant credit experience. We believe that CRE debt markets today present a significant opportunity to capitalize on market dislocations precipitated by the rise in interest rates, declining liquidity and a retrenchment of banks from CRE lending. With an experienced management team that has a proven track record in CRE credit and structured finance, we aim to successfully execute Sunrise's business strategy and generate compelling risk-adjusted returns and long-term value for our shareholders. Slide 14 provides an overview of the market opportunity and why we believe we have the right team to execute on that opportunity. We aim to target transitional business plans with strong sponsors, attractive risk profiles and the potential for value creation. Target investments will include senior loans, mezzanine loans, debt-like preferred equity, special situations, note purchases and recapitalizations. At all times, we will look for downside protection, tight structuring and quality credits to reduce our risk profile. We also have access to a wide pipeline [ in sourcing ] and specialized expertise in underwriting and structuring, with expertise and market insights giving us what we believe is a true competitive advantage. I'll go with this in more detail in a few moments, but there are several persistent and powerful market tailwinds that we believe will benefit the Sunrise portfolio. I'm delighted to be joining and to lead such an experienced team at Sunrise. This is an aligned team that believes in the market opportunity ahead and the ability to generate real value for our shareholders. Now why the Southern United States? The South has seen a surge in population growth for decades, which was dramatically accelerated by the COVID-19 pandemic. Business-friendly environments have attracted some of the country's largest corporations, and state incentive programs continue to attract more. These markets now cater to some of the highest-paying opportunities such as technology and finance. And while the region benefits from economic prosperity, there is an undersupply of high-quality commercial real estate assets, including multifamily, office, retail and industrial assets. That brings us to the overall opportunity set, as summarized on Slide 17, and our view of SUNS' competitive advantage. We are eager to take advantage of the fresh opportunities that we are seeing in CRE throughout the Southern U.S. We believe that our team's proven ability to identify and originate deals with favorable pricing and lender protections, which we strive to execute in a focused and disciplined manner, will bring about significant value creation for our shareholders. With that, I'll turn the call back over to Len for closing thoughts.

Thank you, Brian. This was a long and thought-out process designed to identify the best outcome for our shareholders. This spin-off creates 2 pure-play capital providers, an industry-leading lender in the cannabis industry and a Southern United States-focused commercial real estate credit business, with the expertise and market opportunity to succeed. Post separation, both companies will be better able to grow their respective portfolios, articulate their own clear investment thesis and tailor their business strategies to best capture market opportunities within their specialization. Look. We look forward to sharing more in the weeks ahead, including when we report earnings in 2 weeks, on March 7. And with that, I think we can take some questions on today's news about the separation. Operator?

[Operator Instructions] And this does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.