Good day and welcome to the AFC Gamma Q3 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder this call is being recorded. I would now like to turn the call over to Gabriel Katz, Chief Legal Officer. You may begin.

Good morning and thank you all for joining AFC Gamma's earnings call for the quarter ended September 30, 2023. I'm joined this morning by Leonard Tannenbaum, our Chief Executive Officer; 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 October 18, 2023 press release and is posted on the Investor Relations section of AFC Gamma's website at afcgamma.com, along with our third quarter earnings release and 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 2023 and beyond. These statements are subject to inherent uncertainties in predicting future results and conditions. Please refer to AFC Gamma's most recent periodic filings with the SEC for certain significant factors that could cause actual results to differ materially from these forward-looking statements and projections. During this call, we will also refer to distributable earnings, which is a non-GAAP financial measure. Reconciliations of net income, the most comparable GAAP measure to distributable earnings can be found in AFC Gamma's earnings release and investor presentation available on AFC Gamma's website. The format for today's call is as follows. Len will provide introductory remarks and overview of our third quarter 2023 performance and strategic commentary, Brandon will summarize our financial results and we will then open the line for Q&A. With that, I will now turn the call over to our Chief Executive Officer, Leonard Tannenbaum.

Thank you Gabe. Good morning and welcome to AFC Gamma's earnings call for the quarter ended September 30, 2023. I would like to thank everyone for joining us today to discuss our results. Before turning to the quarterly results, we are very excited and I am personally excited to announce the appointment of Dan Neville, the new Chief Executive Officer of AFC Gamma effective this coming Monday. As Dan joins us in his new role, I will transition from Chairman of the Board and Chief Executive Officer to Executive Chairman of the Board and Chief Investment Officer. Dan joins us from Ascend Wellness Holdings, a leading multi-state vertically integrated cannabis operator where he's held various roles including Interim CEO and most recently as Chief Financial Officer. Dan joined Ascend as one of its first employees and he was instrumental in helping grow the company to an operator with seven states, 2000-plus employees and over $500 million in revenue. Dan's expertise in cannabis operations, M&A activity and deal structuring uniquely positions him to lead AFC Gamma as CEO. We have noticed that as a lend area has become increasingly important to have in-house operating expertise to contribute to the underwriting and portfolio management of cannabis credits. Therefore, Dan's operating and M&A expertise combined with my 25 years of direct lending experience, position AFC Gamma to continue as a leading debt provider in the cannabis industry. We are very excited to have Dan join us as the team and I have worked closely with him on a number of matters when he was at Ascend. For example, we have the opportunity to witness Dan's expertise firsthand as he led Ascend's acquisition of certain assets of two of our portfolio companies. We've also been in frequent communication about the industry and investment opportunities…

Thank you, Len. For the quarter ended September 30, 2023, we had GAAP net income of $8 million or earnings of $0.39 per basic weighted average common share and generated net interest income of $15.3 million and distributable earnings of $9.9 million or $0.49 per basic weighted average common share. As previously mentioned, we believe providing distributable earnings is helpful to shareholders in assessing the overall performance of AFC Gamma's business. Distributable earnings represents the net income computed in accordance with GAAP excluding non-cash items such as stock compensation expense and the unrealized gains or losses, provision for current expected credit losses also known as CECL, taxable REIT subsidiary income or loss net of dividends and other non-cash items recorded in net income or loss for the period. We ended the third quarter of 2023 with $397.8 million of principal outstanding spread across 12 borrowers. Subsequent to September 30, 2023, we received select principal prepayments of debt relating to private company A of $1.7 million. As of November 30, 2023, AFC gamma had $395.1 million of principal outstanding across 12 borrowers. As of September 30, 2023, the CECL reserve represents approximately 4.7% of our loans at carrying value consistent with 4.7% as of June 30, 2023. The weighted average portfolio yield to maturity which is measured for each loan over the life of such loan was approximately 19% as of September 30, 2023, and November 30, 2023. Next let's take a look at our balance sheet which remains strong. As of September 30, 2023, we had total assets of $445.1 million in cash and cash equivalents of $73.2 million. Additionally, we had zero drawn on our line of credit, which provides us up to $60 million in available funds that can be drawn as needed. Currently, the majority of our cash is earning interest of approximately 4.5% to 5.4%. As of September 30, 2023, our total shareholder equity was $338.8 million and our book value per share was $16.56. On October 30, 2023, AFC Gamma paid a dividend of $0.48 per common share for the third quarter to shareholders of record as of September 30, 2023. Year-to-date, we have paid out dividends of approximately 99% of our distributable earnings. As a reminder, on an annual basis, our dividend policy is to pay between 85% and 100% of distributable earnings over the year. With that I will now turn it back over to the operator to start the Q&A. Operator?

[Operator Instructions] Our first question comes from Michael Elias with TD Cowen. Your line is open.

Great. Thanks for taking the question. Few if I may. First, could you provide a bit of color on why now was the time to make the CEO change? And perhaps as part of that how we should think about the strategy moving forward, particularly as it relates to commercial real estate?

Okay. I guess let's start with the CEO change. I'm really pleased to get Dan. When Rob and I looked to each other, when we got buried in portfolio management, as we've talked about on these calls and actually I'm really knock on wood happy about the way things are turning out and turning the corner as a company. So I'm really pleased with having turned the corner. Having said that, I think I forgot after I've done this for 20 years in direct lending, how much time portfolio management says and really it's a strong and heavy lift. And Dan is an absolute expert in that. So we said, who's the one person that we really want in this industry of course excluding the founders who are also very good but not available. And we came upon only one name, which was Dan and when – and it's a person that we frequently called and I was so excited when he wanted to come. And so I think he will be extremely – and he already has been additive in terms of talking directly to our sponsors, talking directly to our deal partners. We help a lot of our sponsors, monetize many of their assets that are non-core assets or even core assets in order to reduce debt or streamline their portfolio. And Dan is truly an expert in that category. So we're really pleased. It's a skill set that while I have some of he's far better than I am. And so it's great to replace yourself in this role. And I'm still there as Executive Chairman and Chief Investment Officer. It's great to replace the role with someone as good as he is. To your second question, we have not yet closed real estate. It's still an open -- the ability for the company to do up to 35% of our assets in real estate. We do have a ton of undrawn capital and liquidity. And due to our successful portfolio management, we're getting back more capital. So I expect going forward, we're hopeful to get both cannabis firing and we did close one deal in cannabis and real estate firing. So we have the company firing on all cylinders to get deployed.

Got it. And just building on that as a follow-up. If I take a look at the disclosures around the pipeline or the active pipeline, I noticed that the cannabis pipeline increased quite notably and the commercial real estate pipeline decrease. Just wondering particularly on the commercial real estate side, if you could just talk about some of the dynamics and the evolution of the market that you have seen and how you're -- the perceived market opportunity for AFC Gamma has evolved in that space?

Hi. This is Robyn. So on the cannabis side, I think we have reinvigorated our origination effort as we've seen more 3.0 players as Len discussed enter the market. And there's been an uptick in acquisition activity by those players which is why you've seen the cannabis pipeline increase. On the commercial real estate side, I think that how we're positioning AFC Gamma is more of a syndicate partner on that side, where we're not necessarily going to be leading transactions, but we do see opportunities in the commercial real estate sector where we can leverage other's expertise to be a co-lender in those situations. So that's why you've seen that pipeline decrease a little bit and I think that's where you're getting the balance this quarter.

Got it. And last question for me is, could you just give us a sense of what to expect at your Analyst Day in December? And as part of that, is there an expectation for like a long-term financial outlook? Any color there in terms of setting expectations would be helpful. Thank you.

Come on you have to have a surprise otherwise it's no fun. I'm previewing it a little bit with my board who were meeting over the next two days and introducing the Board to Dan. I think that has to happen first. And let Dan get his feet wet and I think you should expect Dan to present for Analyst Day and therefore all of our investors his vision in terms of the cannabis industry where we see opportunities and how we're going to approach it differently. And I think that's pretty exciting.

Awesome. Thanks for the color.

Thank you. Our next question comes from John Hecht with Jefferies. Your line is open.

Good morning guys. Thanks very much for taking my question. And you talked about the recent -- I think it was the election in Ohio. But I'm wondering is there anything at the federal or any other state from a regulatory perspective that opens up a market or provides a change in the opportunity for you guys?

Three states that everybody is watching. It's Ohio, Pennsylvania and Florida. Florida lawsuits today or yesterday, I forget which one. So let's watch to see how that lawsuit goes where the governor is challenging it. My gut and it's just my personal opinion, I don't have any good information on this, but I don't think Florida is direct, but you never know. At least I think the governor is too far against it and there's four different wordings that he's challenging. If any one of the wordings fails, I think it doesn't go through from my understanding. But we'll see like -- but not right now, you'll see tomorrow. From Ohio standpoint, look I was hoping it would pass with over 60%. It passed with approximately 57%. And the state senate's going to go against it potentially I think the there's some good threats of bringing this up next year in the election year which is not where the Republicans want it to be. So my hope is that they just leave this alone. Here are the will of the people at 57%. I could be mistaken, but it seems like it passed -- the cannabis passed with even a slightly higher percentage than the abortion pulling. So I mean, the abortion law or a bill or whatever went forth in the vote. So I think that's really positive for the cannabis industry in Ohio that's going to really help a number of operators including a lot of our credits that are there. And the last one is Pennsylvania. And the problem with Pennsylvania is even if Pennsylvania passes, it's -- Pennsylvania takes a long time to do anything. Remember, this is the state where you buy your liquor in a state-controlled liquor store. So it's just a different state altogether.

Okay. That’s helpful. The second question is I mean things have changed a little bit like your underwriting for kind of survivors or consolidators in the cannabis side it looks like you're doing some specialty focus on real -- commercial real estate opportunities how have you changed the call it underwriting and investment approval process given that the scope has changed a little bit?

So we've added to our investment approval process which I still remain -- which I'm still Chief Investment Officer. We have four people now on Committee. We added a very skilled player to the committee, which we needed, right? We have -- as we said we have two in receivership and this and that. So we're really happy to have Bernie Berman joined that committee. He's very, very skilled in this area and we're happy to have him. And then Dan will be added after he joins on Monday to the Investment Committee, which -- so it will expand which is really necessary to have more skill sets on investment committee and thinking through these opportunities. From a general standpoint if you just think about it, the new players are buying things at pennies on the dollar not pennies really $0.50 on the dollar. And cannabis operators in general have built these cannabis facilities and dispensaries at 100 or more than 100 due to delays permitting delays and construction delays. And so if you think about that competitive advantage also of not having sale leasebacks that have now escalated into the 15% range in some cases debt loads that are out of control in some cases including debt costs which are in the mid to high double digits even for the largest MSOs and you'd see them trading. This is a real competitive advantage for the new well-capitalized companies. And we feel very comfortable that they have not only competitive advantage in terms of capital but many of these are run by really good operators that have learned through the business and so we're excited to back them and back their growth.

Great. Thanks very much.

Thank you. Our next question comes from Mark Smith with Lake Street. Your line is open.

Hi, guys. Len you just gave us a good update on some of the new states and things that you're watching. Can you just give us a quick update on states where you are today any that maybe you're seeing some signs of improvement or any that maybe haven't bottomed yet and have moved down lower?

Look I think all states have -- thank god all states have bottomed, but bottomed at really bad levels in terms of California, Oregon, Washington, Colorado and a lot of Michigan. The unlimited license states have gotten your per pound price below marginal cost of production. So those non-vertically integrated operators have really gotten killed. And that's part of the real problem. You have -- if your marginal cost of production is below -- the price is below that you just want to buy for your dispensary and capture margin. And so -- and Arizona is a good example of that. You've seen that in Michigan for sure. Having contrast with that is high-end or high-end brands or well-regarded brands like the one that we back in Michigan even though it's had its challenges they're paying our interest in cash. They're making very good cash flow and that's in a very tough state. And why is that? Because the product is very well regarded. And so there are pockets of bright light even in the unlimited license states. That's our only one, but we're pretty happy about the way it's performing. There are cannabis operators for example our credit in Pennsylvania that generates so much cash that we have cash flow sweeps every quarter and our loan has been paid down significantly almost in half Brandon?

A little less than half, yes.

Yes. And so we're -- we expect to be fully paid on that loan should we not convince them to do a dividend recap or something else by next year because they're performing so well and generating so much cash flow. That's a loan for example that we have an exit fee at the end of that loan. And if -- when they fully pay off the loan we expect to get paid that exit fee and so we should have a benefit next year from that. So it's not like all loans are bad or all loans are good. Oregon is one state are bad I don't want to say it's really company-specific company operations the way they're constructed and their market positioning.

Perfect. And then last question for me. Any updated thoughts as you look at the portfolio and where you want to be in fixed versus variable rates?

I think it is not important anymore. And look I've managed portfolios including a $5 billion asset manager before I sold it to Oaktree. And you always want to be in variable rates when rates are rising. You want to be in fixed rates when rates are dropping. I think this whole concept of being more in variable rates today is not important. I think you want to be -- I personally would rather be fixed and floating today at this moment. I think the Federal Reserve in general has either stopped raising interest rates or within 0.5 point of the stop in raising interest rates. I think the inverted yield curve will reverse next year. And I think this is a good time to have more fixed rate than floating rate. So I know that that's been exciting. And we've actually done a really good job having more floating rate and have benefited from it. If I were doing a new loan today I much rather have it fixed.

Great. Thank you.

Thank you. There are no further questions at this time. I'd like to turn the call back over to Len Tannenbaum for closing remarks.

Thank you all for attending. As was mentioned on the call, we look forward as Dan takes over the CEO slot to provide you more information about his vision and our new very strong push into cannabis. So thanks very much.

Thank you for your participation. This does conclude the program and you may now disconnect. Everyone have a great day.