UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended March 31, 2022
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from __________ to __________
Commission File Number: 001-39995
(Exact name of registrant as specified in its charter)
|
|
|
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification Number)
|
(Address of principal executive offices) (Zip Code)
(561 ) 510-2390
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Trading Symbol(s)
|
Name
of each exchange on which registered
|
|
|
|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large
accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer ☐
|
Accelerated filer ☐
|
|
Smaller reporting company
|
Emerging growth company
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant
to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The approximate aggregate market value of the voting common stock held by non-affiliates of the registrant, as of June 30, 2021, based upon the last sale price reported on the Nasdaq Stock Market (the “Nasdaq”) was
$248,018,374.
|
Class
|
Outstanding at May 9, 2022
|
|
Common stock, $0.01 par value
|
|
INDEX
|
Part I.
|
Financial Information
|
|
|
Item 1.
|
1
|
|
|
1
|
||
| 2 |
||
| 3 |
||
| 4 | ||
| 5 |
||
| 6 | ||
|
Item 2.
|
26 |
|
|
Item 3.
|
39 |
|
|
Item 4.
|
42 |
|
|
Part II.
|
43 | |
|
Item 1.
|
43 |
|
|
Item 1A.
|
43 |
|
|
Item 2.
|
43 | |
| Item 3. |
43 | |
| Item 4. |
43 | |
|
Item 5.
|
44 | |
|
Item 6.
|
45 |
Item 1.
Financial Statements
AFC GAMMA, INC.
CONSOLIDATED BALANCE SHEETS
|
As of
|
||||||||
|
March 31, 2022
|
December 31, 2021
|
|||||||
|
(unaudited)
|
||||||||
|
Assets
|
||||||||
|
Loans held for investment at fair value (cost of $
|
$
|
|
$
|
|
||||
| Debt securities available for sale held at fair value (cost of $ |
||||||||
|
Loans held for investment at carrying value, net
|
|
|
||||||
|
Loan receivable at carrying value, net
|
|
|
||||||
|
Current expected credit loss reserve
|
(
|
)
|
(
|
)
|
||||
|
Loans held for investment at carrying value and loan receivable at carrying value, net of current expected credit loss reserve
|
|
|
||||||
|
|
||||||||
|
Cash and cash equivalents
|
|
|
||||||
| Receivable for loans and securities sold |
||||||||
|
Interest receivable
|
|
|
||||||
|
Prepaid expenses and other assets
|
|
|
||||||
|
Total assets
|
$
|
|
$
|
|
||||
|
Liabilities
|
||||||||
|
Interest reserve
|
$
|
|
$
|
|
||||
| Accrued interest |
||||||||
| Due to affiliate |
||||||||
| Dividends payable |
||||||||
|
Current expected credit loss reserve
|
|
|
||||||
|
Accrued management and incentive fees
|
|
|
||||||
|
Accrued direct administrative expenses
|
|
|
||||||
|
Accounts payable and other liabilities
|
|
|
||||||
| Senior notes payable, net |
||||||||
| Line of credit payable to affiliate, net |
||||||||
|
Total liabilities
|
|
|
||||||
|
Commitments and contingencies (Note 10)
|
||||||||
|
Stockholders’ Equity
|
||||||||
|
Preferred stock, par value $
|
|
|
||||||
|
Common stock, par value $
|
|
|
||||||
|
Additional paid-in-capital
|
|
|
||||||
| Accumulated other comprehensive income (loss) |
( |
) | ||||||
|
Accumulated (deficit) earnings
|
(
|
)
|
(
|
)
|
||||
|
Total stockholders’ equity
|
|
|
||||||
|
Total liabilities and stockholders’ equity
|
$
|
|
$
|
|
||||
(See accompanying notes to the consolidated financial statements)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three months ended March 31, |
||||||||
|
2022
|
2021 |
|||||||
|
Revenue
|
||||||||
|
Interest income
|
$
|
|
$ | |||||
|
Interest expense
|
( |
) | ||||||
|
Net interest income
|
|
|||||||
|
Expenses
|
||||||||
|
Management and incentive fees, net (less rebate of $
|
|
|||||||
|
General and administrative expenses
|
|
|||||||
|
Stock-based compensation
|
|
|||||||
|
Professional fees
|
|
|||||||
|
Total expenses
|
|
|||||||
|
Provision for current expected credit losses
|
(
|
)
|
( |
) | ||||
|
Realized gains (losses) on sales of investments, net
|
||||||||
|
Change in unrealized gains (losses) on loans at fair value, net
|
|
( |
) | |||||
|
Net income before income taxes
|
|
|||||||
|
Income tax expense
|
|
|||||||
|
Net income
|
$
|
|
$ | |||||
|
Earnings per common share:
|
||||||||
|
Basic earnings per common share (in dollars per share)
|
$
|
|
$ | |||||
|
Diluted earnings per common share (in dollars per share)
|
$
|
|
$ | |||||
|
Weighted average number of common shares outstanding:
|
||||||||
|
Basic weighted average shares of common stock outstanding (in shares)
|
|
|||||||
|
Diluted weighted average shares of common stock outstanding (in shares)
|
|
|||||||
(See accompanying notes to the consolidated financial statements)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
|
Three months ended
March 31,
|
||||||||
|
2022
|
2021
|
|||||||
|
Net income
|
$
|
|
$
|
|
||||
|
Other comprehensive income (loss):
|
||||||||
|
Reversal of unrealized loss to recognized loss on debt securities available for sale held at fair value
|
|
|
||||||
|
Total other comprehensive income (loss)
|
|
|
||||||
|
Total comprehensive income
|
$
|
|
$
|
|
||||
(See accompanying notes to the consolidated
financial statements)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
(unaudited)
| Three months ended March 31, 2022 |
||||||||||||||||||||||||||||
| Preferred |
Common Stock
|
Additional
Paid-In
|
Accumulated Other Comprehensive |
Accumulated
Earnings
|
Total
Stockholders’
|
|||||||||||||||||||||||
|
Stock
|
Shares
|
Amount
|
Capital
|
Income (Loss)
|
(Deficit)
|
Equity
|
||||||||||||||||||||||
|
Balance at December 31, 2021
|
$
|
|
|
$
|
|
$
|
|
$ | ( |
) | $ |
(
|
)
|
$
|
|
|||||||||||||
|
Issuance of common stock, net of offering cost
|
|
|
|
|
|
|
||||||||||||||||||||||
|
Stock-based compensation
|
|
|
|
|
|
|
||||||||||||||||||||||
|
Dividends declared on common shares ($
|
|
-
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||||||
| Other comprehensive income (loss) |
- | |||||||||||||||||||||||||||
|
Net income
|
|
-
|
|
|
|
|
||||||||||||||||||||||
|
Balance at March 31, 2022
|
$
|
|
|
$
|
|
$
|
|
$ | $
|
(
|
)
|
$
|
|
|||||||||||||||
| Three months ended March 31, 2021 | ||||||||||||||||||||||||||||
| Preferred |
Common Stock
|
Additional
Paid-In
|
Accumulated
Other Comprehensive
|
Accumulated
Earnings
|
Total
Stockholders’
|
|||||||||||||||||||||||
|
Stock
|
Shares
|
Amount
|
Capital
|
Income (Loss)
|
(Deficit)
|
Equity
|
||||||||||||||||||||||
|
Balance at December 31, 2020
|
$
|
|
|
$
|
|
$
|
|
$ | $ |
|
$
|
|
||||||||||||||||
|
Issuance of common stock, net of offering cost
|
|
|
|
|
|
|||||||||||||||||||||||
|
Stock-based compensation
|
|
|
|
|
|
|||||||||||||||||||||||
|
Dividends declared on common shares ($
|
|
-
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||
|
Net income
|
|
-
|
|
|
|
|||||||||||||||||||||||
|
Balance at March 31, 2021
|
$
|
|
|
$
|
|
$
|
|
$ | $ |
(
|
)
|
$
|
|
|||||||||||||||
(See accompanying notes to the consolidated financial statements)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
Three months ended
March 31,
|
||||||||
| 2022 | 2021 | |||||||
|
Operating activities:
|
|
|||||||
|
Net income
|
$
|
|
$
|
|
||||
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
||||||||
|
Provision for current expected credit losses
|
|
|
||||||
|
Realized (gains) losses on sales of investments, net
|
( |
) | ||||||
|
Change in unrealized (gains) losses on loans at fair value, net
|
(
|
)
|
|
|||||
|
Accretion of deferred loan original issue discount and other discounts
|
(
|
)
|
(
|
)
|
||||
| Amortization of deferred financing costs - revolving credit facility |
||||||||
| Amortization of offering costs - senior notes |
||||||||
|
Stock-based compensation
|
|
|
||||||
|
Payment-in-kind interest
|
(
|
)
|
(
|
)
|
||||
|
Changes in operating assets and liabilities
|
||||||||
|
Interest reserve
|
(
|
)
|
(
|
)
|
||||
|
Interest receivable
|
|
(
|
)
|
|||||
|
Prepaid expenses and other assets
|
|
|
||||||
| Accrued interest |
||||||||
|
Accrued management and incentive fees, net
|
|
|
||||||
|
Accrued direct administrative expenses
|
(
|
)
|
(
|
)
|
||||
|
Accounts payable and other liabilities
|
|
|
||||||
|
Net cash provided by (used in) operating activities
|
|
|
||||||
|
Cash flows from investing activities:
|
||||||||
|
Issuance of and fundings on loans
|
(
|
)
|
(
|
)
|
||||
|
Proceeds from sales of Assigned Rights
|
|
|
||||||
|
Principal repayment of loans
|
|
|
||||||
|
Net cash provided by (used in) investing activities
|
(
|
)
|
(
|
)
|
||||
|
Cash flows from financing activities:
|
||||||||
|
Proceeds from sale of common stock
|
|
|
||||||
|
Payment of offering costs - equity offering
|
(
|
)
|
(
|
)
|
||||
|
Dividends paid to common stockholders
|
( |
) |
(
|
)
|
||||
| Repayments on the line of credit |
( |
) | ||||||
|
Net cash provided by (used in) financing activities
|
(
|
)
|
|
|||||
|
Net increase (decrease) in cash and cash equivalents
|
(
|
)
|
|
|||||
|
Cash and cash equivalents, beginning of period
|
|
|
||||||
|
Cash and cash equivalents, end of period
|
$
|
|
$
|
|
||||
|
Supplemental disclosure of non-cash activity:
|
||||||||
|
Interest reserve withheld from funding of loans
|
$
|
|
$
|
|
||||
|
OID withheld from funding of loans
|
$
|
|
$
|
|
||||
| Sale of Assigned Rights |
$ | $ | ||||||
| Change in other comprehensive income (loss) during the period |
$ | $ | ||||||
| Dividends declared and not yet paid |
$ | $ | ||||||
| Receivable in connection with sale of loan |
$ | $ | ||||||
| Receivable in connection with sale of securities |
$ | $ | ||||||
|
Supplemental information:
|
||||||||
|
Interest paid during the period
|
$
|
|
$
|
|
||||
|
Income taxes paid during the period
|
$
|
|
$
|
|
||||
(See accompanying notes to the consolidated financial statements)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2022
(unaudited)
| 1. |
ORGANIZATION
|
AFC Gamma, Inc. (the “Company” or
“AFCG”) is a commercial real estate finance company primarily engaged in originating, structuring, and underwriting senior secured loans and other types of loans. The Company was formed and commenced operations on July 31, 2020. The Company is
a Maryland corporation and completed its initial public offering (the “IPO”) in March 2021. The Company is externally managed by AFC Management, LLC (the Company’s “Manager”), a Delaware limited liability company, pursuant to the terms of a
management agreement (as amended, the “Management Agreement”). The Company’s wholly owned subsidiary, AFCG TRS1, LLC (“TRS1”), was formed under the laws of the State of Delaware on December 31, 2020, and operates as a taxable real estate
investment trust (“REIT”) subsidiary (a “TRS”), TRS1 began operating in July 2021, and the financial statements of TRS1 have been consolidated within the Company’s consolidated financial statements beginning with the quarter ended September 30,
2021.
The Company operates as one operating segment and is primarily focused on financing senior secured loans and other types of loans for established cannabis industry
operators in states where medical and/or adult use cannabis is legal. These loans are generally held for investment and are secured, directly or indirectly, by real estate, equipment, the value associated
with licenses and/or other assets of borrowers depending on the applicable laws and regulations governing such borrowers.
The Company has elected to be taxed as
a REIT for United States federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2020. The Company generally will not be subject to United States
federal income taxes on its REIT taxable income as long as it annually distributes all of its REIT taxable income prior to the deduction for dividends paid to stockholders and complies with various other requirements as a REIT.
| 2. |
SIGNIFICANT ACCOUNTING POLICIES
|
The accompanying unaudited interim consolidated financial statements should be read in conjunction
with the audited financial statements and the related management’s discussion and analysis of financial condition and results of operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed
with the Securities and Exchange Commission (“SEC”).
Refer to Note 2 to the Company’s Annual Report on Form 10-K for a description of the Company’s
significant accounting policies. The Company has included disclosures below regarding basis of presentation and other accounting policies that (i) are required to be disclosed quarterly, (ii) have material changes or (iii) the Company views as
critical as of the date of this report.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements and related notes have been prepared on the
accrual basis of accounting in conformity with generally accepted accounting principles in the United States (“GAAP”) and in conformity with the rules and regulations of the SEC applicable to interim financial information. These unaudited
interim consolidated financial statements reflect all adjustments that, in the opinion of management, are considered necessary for a fair statement of the Company’s results of operations and financial condition as of and for the periods
presented.
The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved
for the year ending December 31, 2022.
Investment in Marketable Securities
Marketable debt securities are recorded at fair value and unrealized holding gains or losses are excluded from net income on the consolidated income statement and
reported as a component of accumulated other comprehensive income within stockholders’ equity.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect certain reported amounts and disclosures. Actual results could differ from those estimates. Significant estimates include the valuation of loans held for investment at fair value.
Over the course of the coronavirus (“COVID-19”) pandemic, medical cannabis companies have been deemed “essential” by
almost all states with legalized cannabis and stay-at-home orders. Consequently, the impact of the COVID-19 pandemic and the related regulatory and private sector response on our financial and operating results for the period ended March 31, 2022
was somewhat mitigated as all of our borrowers were permitted to continue to operate during this pandemic. Regardless, the full extent of the economic impact of the business disruptions caused by COVID-19 is uncertain. The outbreak of COVID-19
has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving, and many countries, including the United States, have
reacted by instituting quarantines, mandating business and school closures and restricting travel. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including the regulated cannabis industry.
Although most of these measures have been lifted or scaled back, surges of COVID-19 in certain parts of the world, including the United States, have resulted and may in the future result in the re-imposition of certain restrictions and may lead
to more restrictions to reduce the spread of COVID-19. The full effect that these disruptions may have on the operations and financial performance of the Company will depend on future developments, including possible impacts on the performance of
the Company’s loans, general business activity, and ability to generate revenue, which cannot be determined.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The
amendments apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU No. 2020-04
is effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic
848): Scope, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU No. 2021-01 is effective
immediately for all entities. An entity may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new
modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. If an entity elects to apply any of the
amendments for an eligible hedging relationship, any adjustments as a result of those elections must be reflected as of the date the entity applies the election. They do not apply to contract modifications made after December 31, 2022, new
hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain
optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after December 31, 2022). The Company is currently evaluating the impact, if any, of this ASU on its consolidated
financial statements.
| 3. |
LOANS HELD FOR INVESTMENT AT FAIR VALUE
|
As of March 31, 2022 and December 31,
2021, the Company’s portfolio included three 96.2 million and $75.9
million, respectively, and outstanding principal was approximately $95.6 million and $77.6 million, as of March 31, 2022 and December 31, 2021, respectively. For the three months ended March 31, 2022, the Company funded approximately $17.3 million of additional principal and had no
repayments. As of March 31, 2022 and December 31, 2021, none
The following tables
summarize the Company’s loans held at fair value as of March 31, 2022 and December 31, 2021:
|
As of March 31, 2022
|
||||||||||||||||
|
Fair Value (1)
|
Carrying Value (2)
|
Outstanding
Principal (2)
|
Weighted Average
Remaining Life
(Years) (3)
|
|||||||||||||
|
Senior term loans
|
$
|
|
$
|
|
$
|
|
|
|||||||||
|
Total loans held at fair value
|
$
|
|
$
|
|
$
|
|
|
|||||||||
|
As of December 31, 2021
|
||||||||||||||||
|
Fair Value (1)
|
Carrying Value (2)
|
Outstanding
Principal (2)
|
Weighted Average
Remaining Life
(Years) (3)
|
|||||||||||||
|
Senior term loans
|
$
|
|
$
|
|
$
|
|
|
|||||||||
|
Total loans held at fair value
|
$
|
|
$
|
|
$
|
|
|
|||||||||
| (1) |
|
| (2) |
|
| (3) |
|
The following table presents changes in loans 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 loans held at fair value at December 31, 2021
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||||
|
Change in unrealized gains (losses) on loans at fair value, net
|
|
|
|
|
||||||||||||
|
New fundings
|
|
(
|
)
|
|
|
|||||||||||
|
Accretion of original issue discount
|
|
|
|
|
||||||||||||
|
PIK interest
|
|
|
|
|
||||||||||||
|
Total loans held at fair value at March 31, 2022
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||||
A more detailed listing of the Company’s
loans held at fair value portfolio based on information available as of March 31, 2022 is as follows:
| Collateral Location |
Collateral
Type (1)
|
Fair
Value (2)
|
Carrying
Value (3)
|
Outstanding
Principal (3)
|
Interest
Rate
|
Maturity Date (4)
|
Payment
Terms (5)
|
|||||||||||||||||||||
|
Private Co. A
|
AZ, MI, MD, MA
|
C, D
|
|
$
|
|
$
|
|
$
|
|
|
%
|
(6)
|
|
|
||||||||||||||
| Public Co. A | NV | C |
% |
(7) | ||||||||||||||||||||||||
|
Private Co. B
|
MI
|
C |
|
|
|
|
|
%
|
(8)
|
|
|
|||||||||||||||||
|
Total loans held at fair value
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||||
| (1) |
C = Cultivation Facilities, D = Dispensaries.
|
| (2) |
|
| (3) |
|
| (4) |
|
| (5) |
|
| (6) |
|
| (7) |
|
| 4. |
LOANS HELD FOR INVESTMENT AT CARRYING VALUE
|
As of March 31, 2022
and December 31, 2021, the Company’s portfolio included ten and twelve loans, respectively, held at carrying value. The aggregate originated commitment under these loans was approximately $319.9 million and $324.3 million, respectively, and outstanding principal was
approximately $275.8 million and $270.8
million, respectively, as of March 31, 2022 and December 31, 2021. For the three months ended March 31, 2022, the Company funded approximately $34.2
million of additional principal. As of March 31, 2022 and December 31, 2021, approximately 42 % and 48 %, respectively, of the Company’s loans held at carrying value have floating interest rates. These floating rates are subject to LIBOR floors, with
a weighted average floor of 1.0 30 -day LIBOR (unless otherwise specifically stated).
The following tables
summarize the Company’s loans held at carrying value as of March 31, 2022 and December 31, 2021:
|
As of March 31, 2022
|
||||||||||||||||
|
Outstanding
Principal (1)
|
Original
Issue
Discount
|
Carrying
Value (1)
|
Weighted
Average
Remaining Life
(Years) (2)
|
|||||||||||||
|
Senior term loans
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||
|
Total loans held at carrying value
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||
|
As of December 31, 2021
|
||||||||||||||||
|
Outstanding
Principal (1)
|
Original
Issue
Discount
|
Carrying
Value (1)
|
Weighted
Average
Remaining Life
(Years) (2)
|
|||||||||||||
|
Senior term loans
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||
|
Total loans held at carrying value
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||
| (1) |
|
| (2) |
|
The following table presents changes in loans held at
carrying value as of and for the three months ended March 31, 2022:
|
Principal
|
Original Issue
Discount
|
Carrying Value
|
||||||||||
|
Total loans held at carrying value at December 31, 2021
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
New fundings
|
( |
) | ||||||||||
|
Accretion of original issue discount
|
-
|
|||||||||||
| Loan repayments |
( |
) | - |
( |
) | |||||||
| Sale of loans |
( |
) | - | ( |
) | |||||||
| PIK interest | - | |||||||||||
| Loan amortization payments |
( |
) | - |
( |
) | |||||||
|
Total loans held at carrying value at March 31, 2022
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
As of
March 31, 2022, the Company had a receivable related to the sale of the Subsidiary of Public Company D that was sold during the three months ended March 31, 2022 in the amount of $10.6 million, which is recorded within receivable for loans and securities sold in the Company’s consolidated balance sheets.
A more detailed listing of the Company’s
loans held at carrying value portfolio based on information available as of March 31, 2022 is as follows:
| Collateral Location |
Collateral
Type (1)
|
Outstanding
Principal (2)
|
Original Issue
Discount
|
Carrying Value (2) |
Interest
Rate
|
Maturity
Date (3)
|
Payment
Terms (4)
|
|||||||||||||||||||||
|
Private Co. C
|
PA
|
C, D
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|
% | (5) |
|
|
|
||||||||||||
| Private Co. D |
OH, AR | D | ( |
) | % | (6) | ||||||||||||||||||||||
| Private Co. F |
MO | C, D | ( |
) | % | (7) | ||||||||||||||||||||||
| Sub. of Private Co. G |
NJ | C, D | ( |
) | % | (8) | ||||||||||||||||||||||
| Public Co. F |
IL, FL, NV,
OH, MA, MI,
MD,AR, NV,
AZ
|
C, D | ( |
) | % | (9) | ||||||||||||||||||||||
| Sub. of Private Co. H |
IL | C |
( |
) | % | (10) | ||||||||||||||||||||||
| Private Co. K |
MA |
C, D | ( |
) | % | (11) | ||||||||||||||||||||||
| Private Co. I |
MD | C, D | ( |
) | % | (12) | ||||||||||||||||||||||
| Private Co. J |
MO | C |
( |
) | % | (13) | ||||||||||||||||||||||
| Sub. of Public Co. H |
IA, IL, MI, NJ, PA | C, D | ( |
) | % | (14) | ||||||||||||||||||||||
|
Total loans held at carrying value
|
$ | $ | ( |
) |
$
|
|
||||||||||||||||||||||
| (1) |
C = Cultivation Facilities, D = Dispensaries.
|
| (2) |
|
| (3) |
|
| (4) |
|
| (5) |
|
| (6) |
|
| (7) |
|
| (8) |
|
| (9) |
|
| (10) |
|
| (11) |
|
| (12) |
|
| (13) |
|
| (14) |
|
|
5.
|
LOAN RECEIVABLE AT CARRYING VALUE
|
As of March 31, 2022 and December 31,
2021, the Company’s portfolio included one 4.0 2.3 million and $2.5 million as of March 31, 2022 and December
31, 2021, respectively. During the three months ended March 31, 2022, the Company received repayments of approximately $0.3 million of
outstanding principal.
The following table presents changes in
loans receivable as of and for the three months ended March 31, 2022:
|
Principal
|
Original Issue
Discount
|
Carrying
Value
|
||||||||||
|
Total loans receivable at carrying value at December 31, 2021
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Principal repayment of loans
|
(
|
)
|
-
|
(
|
)
|
|||||||
| Accretion of original issue discount | - | |||||||||||
|
Total loans receivable at carrying value at March 31,
2022
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
6.
|
CURRENT EXPECTED CREDIT LOSSES
|
The Company estimates its 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”) using a model that considers multiple datapoints and methodologies that may include the likelihood of default and expected loss given default for each
individual loan, discounted cash flows (“DCF”), and other inputs which may include the risk rating of the loan, how recently the loan was originated compared to the measurement date, and expected prepayment if applicable. Calculation of the
CECL Reserve requires loan specific data, which includes fixed charge coverage ratio, loan-to-value, property type and geographic location. Estimating the CECL Reserve also requires significant judgment with respect to various factors,
including (i) the appropriate historical loan loss reference data, (ii) the expected timing of loan repayments, (iii) calibration of the likelihood of default to reflect the risk characteristics of the Company’s loan portfolio and (iv) the
Company’s current and future view of the macroeconomic environment. The Company may consider loan-specific qualitative factors on certain loans to estimate its CECL Reserve, which may include (i) whether cash from the borrower’s operations is
sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and (iii) the liquidation value of collateral. For loans where the Company has deemed the borrower/sponsor
to be experiencing financial difficulty, the Company may elect to apply a practical expedient in which the fair value of the underlying collateral is compared to the amortized cost of the loan in determining a specific CECL allowance. In order
to estimate the future expected loan losses relevant to the Company’s portfolio, the Company may consider historical market loan loss data provided by a third-party data service. The third party’s loan database includes historical loss data for
commercial mortgage-backed securities, or CMBS which the Company believes is a reasonably comparable and available data set to its type of loans. The CECL Reserve takes into consideration the macroeconomic impact of the COVID-19 pandemic on
commercial real estate properties and is not specific to any loan losses or impairments on the Company’s loans held for investment.
As of March 31, 2022 and December 31,
2021, the Company’s CECL Reserve for its loans held at carrying value and loans receivable at carrying value is approximately $4.0
million and $3.1 million, respectively, or 150 and 120 basis points, respectively, of the Company’s total loans held at carrying value and
loans receivable at carrying value of approximately $267.4 million and $259.7 million, respectively, and is bifurcated between 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 $3.4 million and $2.4 million, respectively, and a liability for unfunded commitments of approximately $0.6 million and $0.7 million, respectively. The liability was based on the unfunded portion of the
loan commitment over the full contractual period over which the Company is 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.
Activity related to
the CECL Reserve for outstanding balances and unfunded commitments on the Company’s loans held at carrying value and loans receivable at carrying value as of and for the three months ended March 31, 2022 was as follows:
|
Outstanding (1)
|
Unfunded (2)
|
Total
|
||||||||||
|
Balance at December 31, 2021
|
$
|
|
$
|
|
$
|
|
||||||
|
Provision for current expected credit losses
|
|
(
|
)
|
|
||||||||
|
Write-offs
|
|
|
|
|||||||||
|
Recoveries
|
|
|
|
|||||||||
|
Balance at March 31, 2022
|
$
|
|
$
|
|
$
|
|
||||||
|
(1)
|
|
|
(2)
|
|
The Company continuously evaluates the credit quality of
each loan by assessing the risk factors of each loan and assigning a risk rating based on a variety of factors. Risk factors include property type, geographic and local market dynamics, physical condition, projected cash flow, loan structure and
exit plan, loan-to-value ratio, fixed charge coverage ratio, project sponsorship, and other factors deemed necessary. Based on a 5-point scale, the Company’s loans are rated “1” through “5,” from less risk to greater risk, which ratings are
defined as follows:
|
Rating
|
Definition
|
||
|
|
1
|
Very Low Risk — Materially exceeds performance metrics included in original or current credit underwriting and business plan
|
|
|
2
|
Low Risk — Collateral and business performance exceeds substantially all performance metrics included in original or current credit underwriting and business plan
|
||
|
3
|
Medium Risk — Collateral and business performance meets, or is on track to meet underwriting expectations; business plan is met or can reasonably be achieved
|
||
|
4
|
High Risk/ Potential for Loss — Collateral performance falls short of underwriting, material differences from business plans, defaults may exist, or may soon exist absent material improvement. Risk of
recovery of interest exists
|
||
|
5
|
Impaired/Loss Likely — Performance is significantly worse than underwriting with major variances from business plan observed. Loan covenants or financial milestones have been breached; exit from loan or
refinancing is uncertain. Full recovery of principal is unlikely
|
||
The risk ratings are primarily based on historical data as
well as taking into account future economic conditions.
As of March 31, 2022 the carrying value, excluding the CECL
Reserve, of the Company’s loans held at carrying value and loans receivable at carrying value within each risk rating by year of origination is as follows:
|
Risk Rating:
|
2022
|
2021
|
2020 |
Total
|
||||||||
|
1
|
$
|
|
$
|
|
$ |
$
|
|
|||||
|
2
|
|
|
|
|||||||||
|
3
|
|
|
|
|||||||||
|
4
|
|
|
|
|||||||||
|
5
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$ |
$
|
|
|||||
| 7. |
INTEREST RECEIVABLE
|
The following table summarizes the
interest receivable by the Company as of March 31, 2022 and December 31, 2021:
|
As of
March 31, 2022
|
As of
December 31, 2021
|
|||||||
|
Interest receivable
|
$
|
|
$
|
|
||||
|
PIK receivable
|
|
|
||||||
|
Unused fees receivable
|
|
| ||||||