1. NON-CASH PAYMENT-IN-KIND REVENUES
2. DELAYED INVESTMENT LOSSES
3. EXORBITANT FEES PAID TO AFC MANAGEMENT
4. SIMILAR FIFTH STEET SCHEME RINSE AND REPEAT
5. “INDEPENDENT” DIRECTORS ARE FIFTH STEET CRONIES
6. ADDITIONAL FINANCIAL RED FLAGS
October 3, 2023 - SHORT AFC GAMMA (Nasdaq: AFCG)
AFC Gamma, Inc. (“AFCG”) is a real estate investment trust (“REIT”) with a US$ ~400 million loan portfolio concentrated amongst multi-state cannabis operators collateralized by cultivation facilities, cannabis licenses & real estate. AFCG attracted conservative investor interest using a mid-teens yield shareholder dividends.
AFCG is 100% externally managed by AFC Management (“AFCM”), a related party privately owned by AFCG’s largest shareholder, CEO & Chairman Leonard M. Tannenbaum (“Tannenbaum”).
We think that AFCG materially overstated AFCG’s investment income and understated portfolio losses in order to pay out exorbitant fees to Tannenbaum’s AFCM at the expense of AFCG shareholders.
• Non-Cash Payment-In-Kind Revenues: PIK interest was substituted for cash in order to artificially inflate AFCG net income. In the past 3 years, AFCG increasingly recorded payment-in-kind interest income (“PIK interest”) instead of collecting cash interest payments from its loan portfolio borrowers. In 2022, AFCG’s non-cash PIK interest was 10% of net income. As of 2Q’23, PIK interest accounted for 37% of AFCG net income.
• Delayed Investment Losses: AFCG was slow to recognize losses to one of its largest credit facility (~20% loan portfolio) in order to maintain inflated asset valuations and exorbitant cash fees paid to Tannenbaum’s AFCM. AFCG recklessly lent out capital in an effort to grow management fees paid to AFCM, which led to poor underwriting and poor investments.
• Exorbitant Cash Fees to AFCM: In past three years since AFCG acquired its initial loan portfolio from Tannenbaum, AFCG paid AFCM $US 54.5 million in compensation and expense reimbursement for a concentrated US$ ~400 million loan portfolio. In 2022, AFCM was paid annual fees and expenses of US$ 19.7 million, equal to 5.3% of loans under management. In the first 6 months of 2023, AFCG paid fees and expenses of US$ 9 million to AFCM, equal to 4.9% of loans outstanding.
We question the authenticity of AFCG’s purported cash balance. On December 30, 2021, AFCG borrowed US$ 60 million from Tannenbaum which was repaid two (2) business days later on January 3, 2022. On December 28, 2022, AFCG borrowed $60.0 million only to be repaid four (4) business days later on January 3, 2023. Why would AFCG take sizeable short-term loans for less than a week at CYE its first two years in a row as a public company?!?
Other red flags exist. AFCG misled investors about the independence of its board of directors, audit, and valuation committee members. In 2018 the SEC found Tannenbaum guilty of misleading investors using a similar scam which resulted in substantial losses for shareholders.
AFCG’s dividends exceeded cash from operations since inception. AFCG has not repurchased shares despite trading at a discount to book value. In 1H’23, AFCG repurchased 10% of its 2027 Senior Notes at a 22% discount to par value which to us suggests a significantly lower price for AFCG’s common equity.
We expect a decline in AFCG net asset values and a lower shareholder dividend from insufficient cash from operations and rising credit losses. We are short AFCG and think that its stock price is going significantly lower…